
I;l3/ii, 



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COPYRIGHT DEPosrr 



OUTLINES OF ECONOMICS 



THE UNIVERSITY OF CHICAGO PRESS 
CHICAGO, ILLINOIS 

Hgents 

THE BAKER & TAYLOR COMPANY 

NEW YORK 



THE CAMBRIDGE UNIVERSITY PRESS 

LONDON AND EDINBURGH 



OUTLINES OF ECONOMICS 

DEVELOPED IN A SERIES 
OF PROBLEMS 



BY MEMBERS 

OF THE DEPARTMENT OF POLITICAL ECONOMY 

OF THE UNIVERSITY OF CHICAGO 




THE UNIVERSITY OF CHICAGO PRESS 
CHICAGO, ILLINOIS 



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"^"i 



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Copyright 1910, 1912, By 
The Univeesity of Uhicago 



All Rights Reserved 



Published September 1910 

Second Impression February 1911 

Second Edition September 1911 

Second Impression October 1911 

Third Edition October 1912 



Coniposoil anil Printed Ky 

The University of Chicaijo Press 

Chicago, Illinois, U.S.A. 



PREFACE TO THE SECOND EDITION 

This book, which has been revised, expanded, and to a consider- 
able extent rewritten since its first pubHcation in tentative form a 
year ago, is the outgrowth of a three years' experiment in elementary 
economic instruction. The problem with which this experiment has 
had to do is sufficiently familiar to teachers of introductory economics: 
the problem of imparting the essentials of economic theory to college 
students who, at the same time that they condemn such generahza- 
tions as remote and unpractical, betray in many ways how limited 
is their own understanding of practical, commonplace, economic 
facts. Fortunately, it is possible not only to link economic theory 
with descriptive material, but in a measure to build the theory up 
out of the familiar events of economic life. This procedure the 
authors have attempted to embody in a series of problems designed 
to guide the student in his reading and to give definiteness and direc- 
tion to classroom discussion. 

The method of the book has been called inductive; but it is induc- 
tive in only a very limited sense. Questions and answers could hardly 
enable beginners in the subject to arrive independently at the con- 
clusions which economic scholars have accepted. The instructor 
must still hold the discussion to a true course. Yet questions can 
and, as experience shows, do serve to arouse interest, to point the 
way in which a sound conclusion lies, and to give a basis for discrimi- 
nating and independent judgment respecting the adequacy of the con- 
clusion which, imder guidance, is reached. A student is well on the 
road to understand the fundamentals of economics so soon as he learns^ 
to reflect intelligently upon what is happening every day in the world 3 
of affairs about him. 

It is not intended that the Outlines shall take the place of a text- 
book. Rather they have been designed to parallel some text, with 
its systematic presentation of economic theory, and they may well 
be further supplemented by readings of a descriptive character. 
A "case-book" of illustrative material is already in preparation for 
use with the Outlines. 



vi OUTLINES OF ECONOMICS 

The authors have been aided both in the writing of the book 
and in the experimenting which led to it, by co-operation, criticism 
and suggestions from many teachers of economics in their own Uni- 
versity and in other institutions. In particular they wish gratefully 
to acknowledge the assistance rendered by Professor J. Laurence 
LaughUn, Professor A. S. Johnson, and Professor R. F. Hoxie, of the 
University of Chicago; Professor F. M. Taylor, of the University 
of Michigan; Professor A. B. Wolfe, of Oberlin College; and Professor 
T, N. Carver, of Harvard University. 

Leon C. Marshall 
Chester W. Wright 
James A. Field 
September, 1911 



NOTE TO THE THIRD EDITION 

In preparation for this new edition the section on The Marginal 
Utility Explanation of Value has been moved to a position more in 
conformity with the order of presentation followed in most of the 
economic textbooks. Minor changes have been made here and 
there throughout the book; but there has been no attempt at 
thoroughgoing revision. 

May, 191 2 



CONTENTS 

PAGE 

A. Introductory i 

B. Economic Wants, Motives, and Choices .... 3 

I. The Characteristics of Wants 3 

II. Means of Satisfying Wants 4 

C. Preliminary Survey of the Economic System ... 7 

I. The Evolution of Industrial Society ... 7 

II. Certain Characteristics of the Present Eco- 
nomic System g 

1. Private Property 10 

2. Freedom of Competition 10 

3. Co-operation through Exchange of Goods . . 11 

4. The Money Economy 12 

D. The Productive Process 14 

I. The Meaning of Production 14 

II. Natural Agents and the Productive Process . 15 

1. The Function of Natural Agents in the Productive 
Process 16 

2. The Increase of Production as Determined by Land 16 

a) Physical Limitation of Land 

b) Exhaustion of the Powers of Land 

c) The Law of Return 

3. The Conservation of Natural Resources . , . 17 

III. Labor and the Productive Process ... 19 

1. The Definition of Labor 19 

2. The Elements of the Labor Power of a Community 19 
c) The Number of Laborers (see the topic "In- 
crease of Population" below) 

vii 



Vlll 



OUTLINES OF ECONOMICS 



b) The Efficiency of Each Individual 

i. Heallh and Strength 
ii. Mental Qualities 
iii. Moral Qualities 
iv. Social Conditions 

c) Time of Labor 

d) Division of Labor (treated under "Organiza 
tion") 

3. The Conservation of Human Energy 

4. The Increase of Population 

a) Natural Increase 
i. The Problem of Numbers 

ii. The Problem of Quality . 

b) Immigration .... 

IV. Capital and the Productive Process 

1. The Definition and Function of Capital 

2. The Accumulation and Conservation of Capital 

V. Organization and the Productive Process 



20 
22 
22 
22 

23 
24 

25 
25 
26 

27 



Specialization 

a) Specialization in Relation to Exchange 

b) The Separation of Occupations 

c) The Division of Labor 

d) Territorial or Geographical Specialization 

i. Grouping of Related Industries 
ii. Grouping of Many Plants of the Same In- 
dustry 

e) Factors Limiting the Degree of Specialization 

i. The Nature of the Industry 

ii. The Extent of the Market 
iii. Social Institutions 
iv. Financial Organization 

The Economic Proportioning of the Productive 
Factors 29 



CONTENTS ix 

PAGE 

3. Present Forms of Industrial Organization . . 30 

a) Forms of Business Organization ... -30 

i. The Individual Firm 

ii. The Partnership 
iii. The Corporation 

iv. Co-operative Enterprise (treated under 
"Social Reform") 

b) The Size of the Most Efficient Unit . . 31 

4. Modern Organization Exemplified by Certain In- 
dustries 32 

a) Agriculture 32 

b) Transportation 34 

i. Transportation in General .... 34 

ii. Railroad Transportation 35 

(a) The Development of Railroad Trans- 
portation 35 

{b) Characteristics of the Railroad Industry 35 

(c) Railroad Rates 36 

c) Manufactures: Large-Scale Industry — the 
Trusts 39 

i. The Origin of the Trust Problem ... 39 
ii. The Trust Movement in the United States . 40 
iii. The Promotion and Organization of a Trust 40 
iv. Analysis of the Causes of the Growth of 
Trusts and the Results of the Trust Organi- 
zation 41 

V. The Lines of Procedure in Deahng with the 

Trust Problem 42 

E. Exchange 44 

I. Markets 44 

II. Value 45 

1. The Nature of Value and Price .... 45 

2. Demand and Supply in Relation to Value . . 46 

3. Normal Value and Normal Price .... 48 

4. The Marginal Utihty Explanation of Value . . 49 



OUTLINES OF ECONOMICS 



5. Analysis of Demand ..... 

a) Meaning of Demand 

b) Determinants of Demand .... 

i. Desire 

(i) Individual Determinants of Desire 
(2) Social Determinants of Desire 
ii. Effectiveness of Desire — Purchasing Ability 
iii. Persons Affected 

c) Certain Characteristics and Special Forms of 
Demand 

i. Elasticity of Demand 

ii. Alternative Demand: The Principle of Sub 

stitution 

iii. Derived Demand 
iv. Composite Demand 

V. Joint Demand .... 

6. Analysis of Supply ... 

a) Meaning of Supply 

b) Determinants of Supply 

i. Cost of Production, Simplified Treatment 
(i) Uniform Cost per Unit of Product 

"Constant Cost" 
(2) Different Costs for Different Units of 

Product 

(a) "Increasing Cost" 
lb) "Diminishing Cost" 
ii. Indeterminate Cost of Production 
(i) Direct Cost and Indirect Cost 

(2) Joint Cost 

(3) Effects of Progress in Methods of Pro 
duction 

(4) Appreciation and Depreciation 
iii. Physical Limitation of Supply 
iv. Monopolistic Limitation of Supply 

v. Social Determinants of Supply 
(i) Formal Social Control 
(2) Informal Social Control 



CONTENTS 



XI 

PAGE 



c) Certain Special Forms or Manifestations of 

Supply 65 

i. Perishable Goods 65 

ii. Joint Supply and By-Products ... 66 

iii. Composite Supply 66 

7. General Questions on Value 67 



III. The Mechanism of Exchange 69 

I. Money Exchange 69 

a) The Nature and Functions of Money 

b) The Characteristics of a Satisfactory Money 
Good . , 

c) The Forms of Money ...... 

i. Standard Money 
ii. Token and Subsidiary Currency 
iii. Credit Money 

d) The Value of Money 

i. The Value of Standard Money 
ii. The Value of Other Forms of Money 

e) Gresham's Law 

f) The Kinds of Standard .... 
The Single Standard (monometallism) 
The Double Standard (bimetallism) 
The Limping Standard .... 
The Tabular Standard and the Method of 
Index Numbers 

V. The Paper Standard (fiat money) 

Credit Exchange 

a) Credit and Credit Instruments 

b) Credit Institutions (with particular reference 
to banking) 

i. Principles of Banking .... 
ii. Clearing-House Operations 
iii. Comparison of Banking Systems . 
iv. Foreign Exchange (treated under "Interna 
tional Trade") 



1. 
ii. 
iii. 
iv. 



69 

70 
71 



72 
72 
74 
74 
75 
75 
75 
77 

77 
78 

78 
78 

79 
79 
81 
82 



xii OUTLINES OF ECONOMICS 

PAGE 

IV. International Trade 83 

1. The Principles Determining International Trade . 84 

a) Trade Based upon Insuperable Diflcrenccs of 
Economic Conditions 

b) Trade Based upon Differences Constituting Re- 
ciprocal Superiority 

c) Trade Based upon Differences Constituting 
Relative Superiority 

2. The Balance-of-Trade Idea 86 

3. Foreign Exchange and International Payments . 87 

4. Regulation of International Trade (with particular 
reference to the protective tariff) .... 88 

F. The Distributive Process 91 



I. Introductory 

II. Rent 

1. Introductory 

2. The Differential Return (without necessary refer 
ence to any particular system of ownership) . 

3. The Relation of Economic Rent to Contract Rent 
under a Regime of Private Property 

4. Rent and Cost of Production .... 

5. Rent in Relation to Taxation .... 

6. Rent and Social Reform 

7. Economic Phenomena Analogous to Rent 

III. Wages and Trade Unionism .... 

1. The Demand for Labor 

2. The Supply of Labor 

3. Some Practical AppHcations of the Principle of 
Demand and Supply to the Subject of Wages 

4. The Specific Productivity Theory of Wages . 

5. Trade Unionism 

a) Causes of Trade Unionism .... 

b) Trade Union Organization and Demands . 



91 
93 
93 

93 

96 

97 
98 
98 
99 

ICO 

too 
roi 

102 
104 
106 
106 
107 



CONTENTS 



Xlll 



c) Trade Union Theory 

d) Trade Union Policies and Methods 

e) The Social Problem of Unionism 



107 
108 
109 



IV. Interest 

1. Introductory .... 

2. The Demand for Capital . 

a) The Demand for Capital Goods 

b) The Demand for Funds 

i. Long-Run Demand . 
ii. Momentary Market Demand 

3. The Supply of Capital 

a) The Supply of Capital Goods 

b) The Supply of Funds . 

i. Long-Run Supply . 
(i) The Savable Surplus 
(2) The Motives to Saving 

ii. Momentary Market Supply 

4. General Questions on Interest . 



V. Profits 

1. Introductory .... 

2. The Risks of Industry 

a) The Nature of Industrial Risks 

b) Speculation in Relation to Risks 

c) Insurance in Relation to Risks 

3. General Questions on Profits 



no 

112 

112 
112 
112 

"3 
114 
114 
114 
114 



no 
117 

118 
118 
119 
119 
120 

123 
124 



G. Public Finance and Taxation . 

I. The Forms of Public Expenditure 
II. The Sources of Public Revenue 

1. PubHc Loans 

2. PubUc Domain .... 

3. Public Industries and Investments 

4. Fees and Assessments . 



126 
126 
126 
126 
128 
128 
128 



XIV 



OUTLINES OF ECONOMICS 



b) 



Taxation 

a) Canons of Taxation 

i. The Principle of Benefit . 

ii. The Principle of Ability or Faculty 
Forms and Incidence of Taxation 

i. The General Property Tax 

ii. Customs Duties 
iii. Excise Taxes .... 
iv. Income Taxes .... 

V. Inheritance Taxes 
vi. Corporation and Business Taxes 
Tax Reform 



c) 



PAGE 
129 
129 
130 
130 

132 
132 
133 
133 
134 
134 

13s 
135 



H. Social Reform 

I. Criticisms of the Present Industrial Order 

1. Economic Defects 

a) Defects of the Productive Process 

i. Wastefulness and Duplication of Effort 

ii. Artificial Stimulation of Wants 
iii. Production for Sale Rather Than for Service 
iv. Carelessness in Conserving Human Energy 

b) Defects of the Distributive Process 

i. Great Inequalities in Possessions and Incomes 
ii. The Unfortunate Situation of the So-called 

Lower Classes 
iii. The Consequences 

2. Resulting Social and Political Defects 

a) Corruption, Favoritism, and Inefficiency in 
Government 

b) Militarism 

c) Vice and Crime 

3. Difficulty (impossibility?) of Remedying These 
Evils under the Present System 

II. Remedies Which Have Been Suggested . . 137 
I. Individual Reform — the Development of Different 
Ideals 137 



CONTENTS XV 

PAGE 

a) The Significance of Individual Reform 

b) The Agencies of Individual Reform 

2. Social Reform 138 

a) Reforms Involving No Vital Change in the 

Present Order 138 

i. Reforms of the Immediate Conditions of In- 
dustry 

(i) On the Initiative of the Persons to Be 
Benefited 

{a) The Trade Union Movement 
(b) Co-operative Enterprises 

(2) On the Initiative of Other Persons 
(fl) Profit-sharing 

(3) On the Initiative of the State 

(o) Regulation of the Conditions of Work 

(b) Workingmen's Insurance and Pen- 
sions 

ii. General Economic and Social Reforms 
(i) On the Initiative of Private Persons 
(a) Philanthropic and Charitable Enter- 
prises 
(2) On the Initiative of the State 

(a) Direct Aid to the Needy — Poor- 

Rehef 
(6) Tax Reforms 

(c) Enlarged Educational Facilities 

(d) Provisions for the Public Health 

b) Reforms Practically Amounting to Revolution 140 

i. Land Nationalization (dealt with under 

"Rent") 
ii. Anarchism 
iii. Communism 
iv. Socialism 

(i) The Socialist Philosophy as Exemplified 
in 
(a) Utopian Socialism 



XVI OUTLINES OF ECONOMICS 

PAGE 

(b) Christian Socialism 

(c) State Socialism 

(d) Marxian Socialism 

(i) The Materialistic Conception of 

History 
(ii) The Marxian Theory of Ex- 
ploitation 
(iii) The Doctrine of Capitalistic 
• Contradictions 

(iv) The Class Struggle and the 

Social Revolution 
(v) The Co-operative Common- 
wealth 
(2) The Socialist Movement 

(a) The Sociahst Program 

(b) The Organization and Extent of the 
Movement 

(c) The Aids and Hindrances to the 
Movement 

III. Suggested Ideals of Distributive Justice . . 142 

1. The Aristocratic Ideal 

2. The Communistic Ideal 

3. The Socialistic Ideal 

4. The Competitive Ideal 



A. INTRODUCTORY 

Economics is the scientific study of tlie activities of men in the 
process of getting a living. As such, it is one of the social sciences; 
for the methods by which men attempt to make a Uving depend on 
the way in which men live together in society. All modern business 
involves a high degree of co-operation, and is to that extent social in 
character. Certain industries and trades are possible only under special 
social conditions: elevated railways and subways do not pay except 
in large cities; shopkeepers can sell only those goods which conform 
to the fashion and usage of the day; saloons and lotteries are subject 
to the public sense of right and wrong, expressed in law. To differ- 
entiate economics sharply from the other social sciences would in 
fact be impossible. Each of these social sciences, investigating its 
own special problems, is, in its attempt to explain them, driven to 
study the forces now operating in society as a whole. All the social 
sciences deal with the process, the evolution, of society; recognize its 
momentary aspect as but one phase of a continuous change; and seek 
in the past history of social institutions an indication of the forms 
they may be expected to assume in the future. In so far as separate 
social sciences are to be distinguished, the distinction is not in fixed, 
exclusive boundaries, but rather in a difiference of emphasis and 
viewpoint. Working within the common field of organized social 
relations, each science treats primarily and centrally a problem 
characteristically its own. 

The economist, in studying the process of getting a living, is 
primarily interested in the manner in which men endeavor to satisfy 
their wants — typically, though not exclusively, the material wants, of 
food, clothing, and other necessary or desirable commodities that we 
make, and sell, and buy, and use. Consequently, in what follows we 
shall study (i) the nature of wants and the appUcation of goods to 
their satisfaction (generally called consumption) ; (2) the bringing into 
existence of the means of satisfying wants (generally called produc- 
tion); (3) the valuation set upon goods in the process of exchanging 
them (generally called exchange) ; and (4) the apportionment or shar- 
ing of these goods among the members of society (generally called 
distribution). Of course some wants are satisfied without effort on 
our part, e.g., our want for air. As such cases present no problem, 
the economist does not concern himself with them. In most cases, 
however, nature does not spontaneously satisfy our wants, and this 
one commonplace fact goes far to explain all human social activity. 



2 OUTLINES OF ECONOMICS 

Questions 

V I. What do you consider the ten most important questions of the 
/ day ? Which of these are essentially economic questions ? How 
many directly or indirectly involve economic matters ? 

2. Name some of the laws passed by our legislatures that have 
economic consequences. Can you mention any important legisla- 
tion that is without economic effect ? 

3. Try to estimate how large a portion of our hfe is given over to 
Xthe attempt to satisfy economic wants. 

4. "To attain better satisfaction of our wants we might do several 
things: (a) diminish the number of our wants; (b) change the char- 
acter of our wants, e.g., develop altruism; (c) provide for larger pro- 
duction and better distribution of wealth." Are any of these being 
done today ? What part of the problem falls to the economist ? 

5. What social problem primarily interests the student of political 
science ? of history ? of ethics ? of social psychology ? How is each 
of these problems related to the central problem of economics ? 

6. If men were never in danger of hunger or other pressing want 
would they work, or steal, or go to war? Are work, and crime, and 
war economic phenomena ? 

7. Would far-reaching economic changes, such as the change from 
good times to hard times, be hkely to have political consequences? 
Would such changes be likely to affect the average man's attitude 
toward life ? 

8. Do you believe that you can form a satisfactory judgment upon 
a given historical period, e.g., the colonial period in America, without 
having a knowledge of the economic conditions of the time ? 



B. ECONOMIC WANTS, MOTIVES, AND CHOICES 

I. The Characteristics of Wants 
II. Means of Satisfying Wants 



This phase of economics is commonly known as The Consumption 
of Wealth, or, more briefly, Consumption, 

I. The Characteristics of Wants 

Since political economy is concerned with the effort to satisfy 
wants, some idea must be gained of the characteristics of wants, 
motives, and choices. This section of the work is, of course, largely 
a discussion of social psychology. Our main concern is with the con- 
sequences of this psychology in so far as these consequences are 
economic. 

Questions 

1. Try to draw up a classified list of our wants. Are they confined 
to things which enter into commerce ? Are they confined to material 
things ? 

2. In the case of most of our wants it is said that a "law of dimin- 
ishing utility" or "law of satiety" applies. 

a) State this law, giving particular attention to a formulation 
of the conditions under which it is true. 

b) What practical results of the working of this law appear in 
the industrial world ? 

3. It is said that "the sum total of human wants cannot be 
sated." 

a) What evidence can you advance concerning the validity of 
this statement? 

b) What practical results of the working of this law appear in 
the industrial world ? 

4. It is said that "wants are determined largely by social 
standards." 

a) What evidence can you advance concerning the validity of 
this statement ? 

b) What practical results of the working of this law appear in 
the industrial world ? 

5. Are our wants wholly under the control of our reason ? Do 
we always desire those things which are beneficial ? Worthy ? Can 
you give cases where wants seem to flow from the action of habit ? 
custom ? social inheritance ? instinct ? 




4 OUTLINES OF ECONOMICS 

V-6. X)o people actually apportion their expenditures for the articles 
tne5MJuy in accordance with their abstract opinions of what would be 
judicious exi)enditurc ? 

""y. Since you must make choices, you probably seek first to gratify 
your most pressing desire, x. Can you tell why :v is at the moment 
the most pressing of your desires ? Would it always be ? 

8. Suppose you had $ioo to spend. Would you spend all of it 
at once ? What would you buy ? Would you buy the same things 
at all times and under all circumstances ? 

9. If you had $200 to spend, would you include among your 
purchases all the things you would have bought for $100? 

■<^io) A spends annually $600. B spends annually $60,000. Is it 
likely that B spends just 100 times as much for clothing as A does? 
Following out this suggestion, classify the expenditures of the ordinary 
'i jJ family under half a dozen general heads and indicate what proportion 
of the total expenditure might fall under each of these heads in the 
cases of A and of B. 

11. Make a list of reasons why men engage in industry and trade. 
Are they ever actuated by altruism, love of power, or patriotic desire 
to contribute to the welfare of their own community ? Should the 
economist deal with such motives as these ? 

12. Should the economist deal with "economic wants, motives, 
and choices," or with all wants, motives, and choices which have 
economic significance? Is economics the only science which is con- 
cerned with human wants ? 

13. Do you think of any form of economic activity which is not 
consciously directed toward the satisfaction of wants ? 

A II. Means of Satisfying Wants 

Means of satisfying wants are called goods. Goods, which may be 
material or non-material, are characterized by the quality of utility — 
the capacity to satisfy wants. 

The following diagram suggests a dcscripti\e classification of 

goods : 

■ Material (wealth) 

Economic Goods 

(have utility, are scarce 
and appropriable) 

Means of Satisfying ) \ Non-Material (services) 

Wants — ^(Jocds \ 

Material 



Free Goods 



[The economist does 
not concern him- 



(have utility) j J self with these] 

Non-Material 



ECONOMIC WANTS, MOTIVES, AND CHOICES 5 

Questions 

'i . Does every good possess utility ? Is everything which possesses 
ut^ity a good ? 

2. Have the following utility: whiskey, a gambler's pack of cards, 
clothes of an obsolete fashion, opium, grand opera, air? 

3. Which has the greater utility, a diamond or a barrel of flour? 
the rare first edition of an old book or a modern copy, better printed 
and better bound ? Why ? 

4. Are the following appropriable: (a) a loaf of bread; (b) a coal 
mine; (c) sunshine; ((/) the Mississippi river; (g) a public park ; (/) a 
band-concert ? What is meant by "appropriable" ? 

/' 5. Give examples of non-material economic goods, of non-material 
free goods, and of material free goods. 

6. Should the economist be as much concerned with non-material 
as with material economic goods? Can we say that one class is 
more important than the other ? 

Jly Make a list of things which are clearly wealth. 
(^, Make a list of things which are clearly not wealth. 

9. Make a list of things concerning which you are in doubt 
whether they are wealth. 

10. Define wealth. 

v^^^^-TiV^re the following wealth: an ocean steamship; a pleasure 
yacTTT; a ship on the bottom of the ocean ; gold in the mine; gold, to a 
shipwrecked sailor on a desert island ; a wooden^leg ^ health ; eyesight ; 
a waterfall; a head full of useful knowledge; water? "~~ "~ 

12. "A thing may be wealth th'onglritTSTiot useful, e.g., an Indian 
arrowhead." Comment. 

13. Is an encyclopedia wealth ? among Indians ? 

14. Could a thing that was wealth at one time cease to be wealth 
<at some other time ? Could the reverse be true ? Why ? 

X5. If a coat should go out of style would it still be wealth ? 
'r6. What distinguishes wealth from services ? 

17. Should we consider services which have a tangible result more 
important than those which do not ? Give several illustrations of 
each kind. 

1 8. From the point of view of the economist could you accept as 
a definition of wealth — 

a) Means of satisfying wants ? '~ '^-^ 

b) Things which make for welfare ? 

c) Material means of satisfying wants ? I"""^ 

d) Material things upon which labor has been expended ? 

19. Are the following wealth: a court-house; a warship; a city- 
hall; a public library ? 



6 OUTLINES OF ECONOMICS 

20. How do you distinguish between social wealth and private 
wealth ? Does social wealth include more than private wealth ? 

21. When a United States gold certificate is destroyed is wealth 
destroyed ? 

22. Is a railroad bond wealth? Is a yjatented invention? a fire- 
insurance policy ? 

23. Suppose a new source of mechanical power should become 
available at one-fourth the cost of steam-power. What would be the 
effect on wealth in general ? Would any individuals be made less 
wealthy by the new discovery ? 

24. If wealth increases will there be greater well-being ? What 
is the relation of wealth to well-being ? 

25. "To be wealth a thing must be scarce." Is that equivalent 
to saying that the less we have of things the better off we are ? What 
do you mean by "scarce" ? 

26. Is a man's wealth measured by the number,, or bulk, or weight 
of his possessions, or by their money value ? Is a scarce article likely 
to command a higher price than one that is common ? Does this 
imply that wealth is increased by scarcity of goods ? 

27. Should you accept as true the statement that the scarcity of 
certain desirable articles, such as jewels, may enhance the comparative 
wealth of an individual, but that general welfare is promoted by 
abundance of the commodities which people desire ? Why ? 



C. PRELIMINARY SURVEY OF THE ECONOMIC SYSTEM 

I. The Evolution of Industrial Society 
II. Certain Characteristics of the Present Economic System 



A view of a machine as a whole aids in understanding the functions 
of the parts. A brief general survey of the modern industrial system, 
showing how it originated, how it developed, and what are some of 
its salient features at the present time, is likely to be a useful prelimi- 
nary to the later detailed study of its operations. 

I. The Evolution of Industrial Society 

Continuous change goes on in industrial society. The economic 
organization which prevails in the United States at the present time 
is in many essentials very different from that which prevailed in the 
early colonial days or at the outbreak of the Revolution, or even fifty 
years ago. Fifty years from now it may be very different from what 
it is today. The changes are the result of many and complex 
factors such as natural forces and conditions, human effort, social 
institutions, etc. Always the economic motive is prominent — the 
desire to devise better methods of enabling us to satisfy our economic 
wants. 

As industry has developed from the earher forms to the present 
form there has constantly been a tendency toward specialization. 
Occupations have become differentiated, division of labor has in- 
creased, productive processes have become more efficient as well as 
more complex, and the time which elapses between the beginning of 
the production of a good and the consumption of that good has been 
greatly lengthened. Without attempting to press too far into the 
origins of society we may distinguish four main stages of develop- 
ment, from the point of view of industrial society: (i) The independ- 
ent or domestic economy; (2) the town or local economy; (3) the 
national economy; (4) the international or world economy. 

The first stage is illustrated by the Indian, the patriarchal family, 
the primitive tribe, or the western pioneer. The wants of all in 
these cases were supplied by the products of their own efforts without 
any very roundabout process. The next stage appears where an 
exchange of products becomes customary. Division of labor takes 
place. The process of production occupies a longer time and becomes 
more efficient, thus making it possible for a given area to support a 



8 OUTLINES OF ECONOMICS 

larj^er population. Then, as means of transportation improve, one 
section of the country begins to speciaHze in one thing and another 
section in something else; they are no longer independent self-sufhcing 
units; the process of production becomes more complicated; and we 
have the growth of a national economy. Sometimes this process of 
specialization may be carried so far that a whole nation comes to 
speciaHze in manufacturing, and becomes very largely dependent 
upon other countries for its raw material and food supplies, as in 
the case of Great Britain today. Such a situation may well be called 
an international economy. The present tendency toward this stage 
is manifested in the increasing dependence of modern nations upon 
foreign supplies and foreign markets. 

These stages of economic development have appeared in different 
countries at different times; in some places one stage continued 
dominant for many centuries, as in parts of Europe; in others a stage 
may have lasted but a few decades, as in the United States. There 
are many intermediate stages, and one seldom finds a situation where 
the household, the locality, or the nation is absolutely self-sufficing. 

Questions 

1. Are any industries today in the handicraft stage? 

2. Why were there formerly many more "jacks of all trades" than 
there are now ? 

3. Mention some concrete cases where (a) the development of 
transportation and communication, ■ (b) geographical conditions, (c) 
social institutions, (d) racial characteristics, ha\-e influenced the e\-o- 
lution of industrial society. 

4. In the evolution of industrial society trace some of the mani- 
festations of increase in (a) speciahzation and division of labor; (6) 
social interdependence; (c) complexity of form; (d) productive 
efficiency. 

5. Was there formerly the gulf between the laboring class and 
the employing class that exists today ? 

6. Formerly a cobbler owned his own shop and tools, managed 
the shop, employed apprentices, and did some of his work himself. 
How does the modern large shoe factory differ from that ? 

7. Do you think the modern organization of industry requires 
greater managerial skill and ability than formerly, and if so, why? 

8. Do the captains of industry of today usually own the concerns 
they manage ? What was the situation in earlier times ? 

9. Suppose all the railroads i;i the country were removed. How 
would that affect the efficiency of industry ? 

10. Trace in detail and from the very first the processes which 



PRELIMINARY SURVEY OF ECONOMIC SYSTEM 9 

have aided in supplying you with your cup of coffee. How many 
people do you suppose helped in those processes? Do you think 
it desirable to be dependent on so many people in the satisfying of 
your wants ? 

II. Estimate the time that has elapsed since the first steps were 
taken which have resulted in the issue of this morning's daily news- 
paper. Why is it worth while to spread the work over so long a 
period ? 



II. Certain Characteristics of the Present Economic System 

1. Private Property 

2. Freedom of Competition 

3. Co-operation through Exchange of Goods 

4. The Money Economy 

The present . stage of economic evolution, as evidenced in the 
United States, is marked by specialized production, in connection 
with a highly developed system of the exchange of goods. This 
development of exchange, in turn, is facilitated by the convention of 
money-payments instead of the more primitive and inconvenient 
method of barter. Centralization and enlargement of the scale of 
industry have accompanied the widening of markets. Capital, 
invested in machinery and other equipment, has so accumulated that 
the owners of capital exercise a dominant influence in industrial 
management. Underlying these modern economic manifestations 
are the long-established institution of private property and the more 
recent assumption that every man is, in theory at least, individually 
free to work for the furtherance of his own interests, as he conceives 
his interests, according to principles of comparatively unrestricted 
competition. 

These several features of the current economic process will be 
subsequently encountered in the discussion of various specific prob- 
lems. Private property, competition, exchange-co-operation, and 
the money economy are selected for more particular notice at this 
point. They are to be regarded as devices for increasing our power 
over the external conditions of existence — i.e., satisfying our wants — 
which have proved so successful that they have been generally 
adopted. Although these devices are, properly speaking, in them- 
selves economic phenomena, we more often think of them as condi- 
tions underlying our economic activities, and economic science in a 
measure takes them for granted as fundamental characteristics of our 
civilization. 



lo OUTLINES OF ECONOMICS 

1. Private Property 

Questions 

1. If a man steals a watch does it become his property? What 
is the difference between possession and property ? 

2. Might there be private property in clothes, weapons, and other 
articles of personal use apart from a recognition of similar property- 
rights in land, machinery, factory buildings, etc. ? 

3. If there were no assurance of undisturbed and permanent 
possession of land would men (a) hunt? (b) raise cattle? (c) plant 
crops ? (d) build houses ? (e) construct railroads ? 

4. What relation can you point out between private property 
and (a) social peace and order? (b) foresight and industriousness ? 
(c) invention ? (d) capitalistic production ? (e) the private family ? 
(/)j)rovision for education of children and their start in life ? 

/^. \ Should property- rights last beyond one lifetime ? 

6. Compare the right of inheritance and the power of bequest as 
motives to industrial efificiency. 

1^ Make a list of the disadvantages of private property, 
^.^s private property a natural, inalienable, inherent right, or a 
matter of social agreement, based on expediency ? 

9. Should the right to private property be restricted or abolished 
if in the judgment of society its disadvantages outweigh its advan- 
tages ? Have property-rights been limited in the past ? 

2. Freedom of Competition 

Under this head are treated together freedom of initiative, freedom 
of contract, and the principle of self-interest. 

Questions 

1. Is everyone free to run a saloon? to practice law? to sell 
adulterated food ? to conduct a lottery ? to sell cigarettes to minors ? 
to sell himself into slavery ? to fix cab-fares ? 

2. Make a list of practical obstacles, as distinguished from legal 
restrictions, which limit industrial freedom. 

3. Our present system has sometimes been termed an industrial 
anarchy. What does this mean ? Is the characterization just ? 

4. Should there be any presum})tion either for or against "state 
interference," or should each case be decided upon its merits ? What 
do you mean by "merits" ? 

5. How does it happen that we do not have the state look after 



PRELIMINARY SURVEY OF ECONOMIC SYSTEM ii 

ihe supplying of our wants instead of relying on individual initiative ? 
Do you know of any case where the state does carry this burden ? 

6. Does the government violate the principle of free initiative 
by (a) subsidizing steamship lines? (b) paying bounties for killing 
woodchucks?. Do these policies imply that individual initiative is 
an inadequate motive to economic activity ? 

7. Can you mention cases where the state takes part directly in 
industry today ? 

8. Are there any ways in which the state aids indirectly in industry 
today ? 

9. In so far as the state participates in industry, is its participa- 
tion intended (a) to exclude private industry ? (b) to compete with 
private industry ? (c) to make up for the lack of private industry ? 

10. To what extent is competitive business dominated by self- 
interest ? 

11. Does the ordinary man know what is for his best interest? 
Would it be safe to assume that men always pass an inteUigent 
judgment upon the advantages and disadvantages of any course of 
action ? How does your answer bear upon the vaHdity of the assump- 
tion that free competition is desirable ? 

3. Co-operation through Exchange of Goods 

Everyone appreciates that the modern industrial society is an 
"exchange-society." Practically no one produces all, or even many, 
of the things he consumes. It is not so generally appreciated as it 
should be that this is in reality a process of co-operation, none the 
less real because carried on unconsciously. No formal machinery 
has been set up by conscious action, but, as Professor Taylor says, 
our co-operation is both effected and regulated by exchange. 

Questions 

1 . Why does not everyone make the same commodity ? 

2. How does it happen that the things produced are generally the 
things we want? 

3. Discuss the situation of a coal miner under a system accord- 
ing to which his wages could consist of only the goods he produced. 
Could coal be used as fuel to any general extent under such 
conditions ? 

4. Show how our co-operation is effected through exchange. 

5. Show how our co-operation is regulated by exchange. 

6. "Exchange does not really help. Indeed it hinders. Time 
and energy are spent in merely passing goods on." Do you agree ? 

7. Adam Smith, in a famous passage in The Wealth of Nations, 



12 OUTLINES OF ECONOMICS 

observes that every individual who, in pursuit of his own gain, directs 
his industry in such a way that the product may have the greatest 
possible value, is "led by an invisible hand" to promote unintention- 
ally the public welfare. Should you accept as true the implication 
that exchange-co-oj^eration completely reconciles the interests of 
individuals and the community ? Are individuals ever rewarded for 
actions which yield a present benefit to some, but are in the long run 
detrimental to society ? 

8. Are the goods which sell to the best advantage necessarily or 
usually the most serviceable ? 

9. Does the manufacturer know the precise tastes and needs of the 
persons who are to use his product? Does he know what sorts of 
goods will be most readily salable through wholesalers ? In deciding 
what to make does he primarily consider the nature of human wants 
or immediate market conditions? 

10. How far true is the statement that exchange leads to increase 
of individual wealth rather than to enhancement of the general 
welfare? Would general welfare be furthered if exchange-co-opera- 
tion were abandoned ? 

11. Attempt to summarize the social benefits of exchange-co-opera- 
tion. 

12. Could organized exchange exist if there were no recognition 
of private property ? 

4. The Money Economy 

Questions 

1. To what extent would contemporary industrial methods be 
possible if the device of money had never been adopted as a means of 
facilitating exchange ? 

2. How could you, without reckoning in terms of dollars and cents 
or other monetary units, answer such a question as (a) by how much 
did exports exceed imports in a certain year ? (b) how large a business 
does X transact ? (c) does your farm pay ? 

'3. If the money value of the wheat crop should some year exceed 
the money value of the previous crop by 100 per cent should you say 
the crop was twice as great as before ? 

4. Is money an adequate measure of (o) effort ? (b) utility ? (c) 
welfare ? 



The intricacies of exchange and of the money economy can be 
only very superficially touched upon at this stage of the study. But 
it is important from the start to recognize two principles, neglect of 



PRELIMINARY SURVEY OF ECONOMIC SYSTEM 13 

which introduces a certain element of confusion into subsequent 
analysis unless great pains be taken to make allowance for them. 

(i) In an economic system based on exchange the immediate 
advantage of a bargain is more likely to occupy men's minds and to 
determine their actions than is concern for the ultimate good which 
may result to society. Consequently, in dealing with many problems, 
individual advantage and social advantage must be considered 
separately. The corresponding distinction, between individual or 
acquisitive gain and social gain, is of much importance and no little 
difficulty. The interests of the individual and of society are not 
necessarily opposed, but they often may be. 

(2) Economic quantities are expressed sometimes in terms of num- 
ber, bulk, etc., and at other times in terms of money value. Thus a 
job may be said to involve three days' labor, or six dollars' expen- 
diture for wages; a crop may be estimated as 1,500 bushels, or $800; 
a spinning mill may be described as of so many spindles, or in terms of 
the money invested. Of these two forms of expression, the pecuniary, 
or money-value form, is probably the more usual in ordinary lan- 
guage; but on the other hand, in the investigation of problems it may 
well be more important to deal with days or hours of labor, or with 
the visible form of the result. Neither terminology can be adequately 
translated into the other. Logically, therefore, economics as a sys- 
tematic science should adhere to one or the other consistently. In 
this book logical consistency is consciously sacrificed in the attempt 
to present each of the several economic questions in the form which 
seems most appropriate to the purpose of an elementary course. 
The student is cautioned to guard himself as far as possible against 
confusion in consequence of this change of viewpoint. 



D. THE PRODUCTIVE PROCESS 

I. The Meaning of Production 

II. Natural Agents and the Productive Process 

III. Labor and the Productive Process 

IV. Capital and the Productive Process 

V. Organization and the Productive Process 



I. The Meaning of Production 

Production is the bringing into existence of economic goods in 
order to satisfy the wants which nature does not freely furnish the 
means to satisfy. As has been seen these goods may be material or 
non-material, and it is not possible to say that one form is more 
important than the other. 

The productive process does not exist as a thing in itself, separate 
from the exchange and distributive processes. But at this point in 
our study emphasis will primarily be placed on the productive aspect 
of industrial society. In dealing with complex and interacting 
phenomena it is necessary to resort to such abstractions chiefly as a 
method of exposition. 

Questions 



^ I . Give examples of the crea,tion of form-utilities ; of place-utilities ; 
of time-utilities; of possc^lbn-utilities. 

2. Is a railroad an instrument of production, of exchange, or of 
distribution, in the economic sense ? 

3. Are the following enterprises productive: cold storage; the 
express business; the mail service; the telephone service; a retail 
candy business; speculative buying of grain to be held for a rise in 
pric^4^ :"••-*-{', 

/j^ Are b^ek-agents producers or mere parasites on the industry 
of others ? 

5. Do you agree with the doctrine that what one man gains at 
trade other men necessarily lose ? 

6. It was once maintained that agriculture and mining are the only 
forms of industry truly productive, inasmuch as manufacture merely 
elaborates the commodities which agriculture and mining have pro- 
duced. Criticize this argument. 

14 



THE PRODUCTIVE PROCESS 15 

7. Do social conditions guide, restrict, or otherwise influence 
production ? If so, give concrete examples. 

8. Is a poor crop a sign of a poor farmer ? of a poor farm ? of a 
poor season ? 

9. Can you establish which is the more important factor in pro- 
duction : human ability or the responsiveness of our surroundings ? 

10. Can one estabUsh that nature aids more in one industry than 
in another? 

11. Describe carefully what "production" involves in the case of 
(c) coal; (b) lumber; (c) hay; (d) champagne; (e) watches; (/) 
books. 

12. Production has been classified descriptively as follows: 

A. Material Production 

a) Mere occupancy 

b) Extractive industries 

c) Manufacturing 

d) Transportation 

B. Non-Material Production 

a) Ideas with economic consequences 

b) Work of credit institutions 

c) Services, e.g., work of domestics, teachers, etc. 
Give illustrations. Draw up a classification of your own. 



In the following sections (II-V) we shall be concerned with an 
analysis of the various parts or agents of the productive process. 
Much of the matter to be presented is descriptive rather than strictly 
logical, and much of it has to do with the technique of industry. In 
dealing with these agents of the productive process it is particularly 
important to observe the precautions suggested on p. 13, and to 
discriminate (a) between the individual and the social viewpoint, and 
(b) between the pecuniary terminology and the terminology which 
reckons with labor-time, and with number or bulk of materials and of 
output. 

II. Natural Agents and the Productive Process 

1. The Function of Natural Agents in the Productive Process 

2 . The Ificrease of Production as Determined by Land 

3. The Conservation of Natural Resources 

The term "natural agents," in this connection, includes all factors 
and conditions affecting production which are non-human and essen- 
tially independent of human effort and ingenuity. 



i6 OUTLINES OF ECONOMICS 

1. The Function of Natural Agents in the Productive Process 
' Questions 

1. Give examples of industries j^eculiarly dependent on fi;ravita- 
tion, rain, wind, sunshine, tide, moisture, temperature, qualities of 
soil. 

2. How have natural conditions affected the industry of Michigan, 
Greenland, Egypt, Central America ? 

3. What are the chief natural resources of the United States ? In 
respect of what resources is the United States pre-eminent ? 

4. In his practical discussion of "natural agents" the economist 
largely confines his attention to what is generally known as land. 
Can you justify this ? 

5. Which of the various physical properties of land are of special 
importance to (a) the lumberman ? (b) the miner ? (c) the manufac- 
turer ? (d) the shopkeeper ? (e) the traveling salesman ? (/) the civil 
engineer ? (g) the fisherman ? 

6. Is land necessary to all production ? How about the services 
of the domestic servant ? 

7. Generalizing your answers to the two preceding questions, in 
what fundamental ways does land aid in production ? 

2. The Increase of Production as Determined by Land 

a) Physical Limitation of Land 

b) Exhaustion of the Powers of Land 

c) The Law of Return. (This law is discussed here as applying 
only to land. A wider application of the principle will be made 
later under the topic of "Organization.") 

Questions 

1 . Is there any limit to the amount of land ? 

2. What is made land ? Can land be made by draining ? irrigat- 
ing ? fertilizing ? addition of sand or clay ? 

3. What is meant by the expression "exhausted land"? What 
properties of land are subjected to exhaustion ? 

4. What is rotation of crops ? Why is it resorted to ? 

5. Why should a farmer ever break up new land? 

6. Why does any farmer cultivate more than one acre at any one 
time? 

7. Why are different qualities of land under cultivation ? 

8. State the principle of diminishing returns from land. 



THE PRODUCTIVE PROCESS 17 

9. What is intensive cultivation ? What is extensive cultivation ? 
Give examples. 

10. Explain the term margin of cultivation, distinguishing between 
the extensive margin of cultivation and the intensive margin of culti- 
vation. 

11. Work out a demonstration of the fact that the profitable 
limit to intensive cultivation is reached at the point where the return 
to the last unit of labor and the last unit of capital corresponds to 
the return to labor and capital on land at the extensive margin of 
cultivation. 

12. Is the best land always utilized first? Did the Plymouth 
colonists cultivate the best soils in America ? Did they presumably 
cultivate at the outset the most fertile land in Plymouth ? Why ? 

13. Does the fact that many New England farmers have moved 
westward to better land disprove the law of diminishing returns ? 

14. In what sense is it true that the extension of agriculture and 
manufacture involves resort to land less fertile or less advantageously 
situated than the land previously in use ? 

15. A certain farmer, by draining and fertilizing his land, has 
gradually so improved it that it would now yield, to the same amount 
of labor, twice as much product as formerly. Nevertheless, the 
cultivation of this land has from the first been attended with diminish- 
ing returns. Explain. 

16. Point out clearly the distinction between diminishing returns 
from land and declining fertility of land. 

17. Distinguish clearly (a) increasing returns from land; (b) utili- 
zation of better land; (c) better utilization of land according to 
existing agricultural methods; (d) effects of the discovery of new 
and improved agricultural methods. 

18. Does the law of diminishing returns apply to land only in the 
case of its use for agricultural purposes ? 

19. Does the law of diminishing returns apply to a coal mine? to 
building sites in the center of a city ? 



3. The Conservation of Natural Resources 

Questions 

1. Does conservation mean non-utilization of natural resources, 
or such utilization as shall cause a minimum impairment of the natural 
resources of the future ? 

2. A man owns a tract of timber on a mountain side, If he leaves 



1 8 OUTLINES OF ECONOMICS 

it in its natural state the old trees will die out and be wasted, the 
growth of new trees will be slow, and the presence of dead wood and 
underbrush may increase the danger of loss by fire. If he cuts gradu- 
ally and scientifically he may get a regular income from the timber 
removed and yet improve the quality of what remains. If he cuts 
all off at once he will realize the largest immediate revenue above 
expenses of lumbering, but the land will be wasted by washing and by 
a useless second-growth. Which procedure would be conservation ? 

3. Does conservation require a sacrifice of the present generation 
for the benefit of future generations ? On what grounds could such 
a sacrifice be demanded ? 

4. It is argued that the public land policy of this country, by 
disposing of lands at a nominal price, has led to wasteful agriculture. 
What is meant by wasteful agriculture ? Would anyone deliberately 
waste his own land ? 

5. European visitors to the United States have often been shocked 
at the apparent wastefulness of the extensive cultivation practiced 
on American plantations and farms. Would it have been less waste- 
ful to practice farming in this county after the fashion of European 
peasants who build stone terraces to hold the soil on hill slopes, or 
carry home by hand bundles of hay which they have mowed on the 
mountain side? 

6. What should you say to the statement that nobody can afford 
to practice conservation in his own interest until most of the resources 
which might have been conserved are already exhausted ? Does this 
suggest that conservation should be a governmental function ? 

7. Since the beginning of the petroleum industry in this country 
the output has been doubling every nine years. At this rate of 
development the present known supply of petroleum will be exhausted 
by 1935. What measures might be adopted to make the supply hold 
out longer? Have substitutes for petroleum been invented in the 
past ? Can you foresee further substitution ? 

8. It has been contended that the supply of phosphates in the 
United States should be guarded by prohibiting their export. Would 
this be wise ? If other nations retaliated by prohibiting the export of 
their raw products should we be better or worse off than before ? 

9. The coal supply in this country, according to a recent estimate, 
will be exhausted in 150 years. What economies in the use of coal 
might be practiced in order to conserve this resource ? 

10. Suggest methods of safeguarding the future of our timber- 
supply. 



THE PRODUCTIVE PROCESS 19 

III. Labor and the Productive Process 

1 . The Definition of Labor 

2. The Elements of the Labor Poiver of a Community 

3. The Conservation of Human Energy 

4. The Increase of Population 



1. The Definition oe Labor 

Questions 

1 . Should the effort of a dray-horse be called labor ? 

2. Give examples of human activity which should unquestionably 
be regarded as labor. 

3. Give examples of human activity which clearly is not to be 
regarded as labor. 

4. Is the effort of the following to be called labor: a banker, a 
college football player, a professional baseball player, a promoter, 
an opera singer, a hod-carrier, a preacher, a voluntary settlement- 
worker ? 

5. Should you call the hod-carrier a laborer if he worked for 
pleasure? Should you call the college foot])all player a laborer if 
he were given his board ? 

6. In order that human activity should be regarded as labor is it 
necessary that it should (a) be attended with a sense of unpleasant 
effort? {h) be physical rather than mental? {c) be intended as a 
means to an end, rather than be desirable in itself? {d) actually 
result in a product ? (e) result in a material product ? ( / ) command 
remuneration in money or the equivalent ? 

7. In the light of the preceding questions how should you define 
labor ? 

8. Is the necessity of labor peculiar to the present organization 
of society? Can you conceive of any social reform which might 
abolish the necessity of labor ? 

2. The Elements of the Labor Power of a Community 

a) The Number of Laborers (see the topic "Increase of popula- 
tion" below) 

b) The Efficiency of Each Individual 

i. Health and Strength 

ii. Mental Qualities 

iii. Moral Qualities 

iv. Social Conditions 



20 OUTLINES OF ECONOMICS 

c) Time of Labor 

d) Division of Labor (treated under "Organization") 

Questions 

1. What is meant by "efficiency" of labor? 

2. Is efficiency an absolutely definite quality, inherent in an indi- 
vidual, and independent of social conditions ? 

3. How largely is efficiency due to (a) innate capacity? {b) train- 
ing and the opportunity to work at the task for which one is best 
fitted ? 

4. Mention some of the mental qualities which ordinarily conduce 
to the efficiency of a workman. 

5. What moral qualities can you cite to explain the superior 
efficiency of American laborers ? 

6. Would ambitious and alert self-interest, apart from social or 
altruistic motives, result in the highest efficiency of labor ? 

7. To what extent is the efficiency of labor dependent on the intel- 
ligence and consideration shown by employers ? 

8. Judging by the present direction of industrial development, is 
physique, intellect, or social organization likely to count for most in 
any future increase of productive efficiency ? 



3. The Conservation of Human Energy 

The following scheme indicates some of the forms of the waste of 
human energy: 

EXAMPLES OF THE WASTE OF HUMAN ENERGY 

d) Destructive Occupation 

i. Persons Consciously or Unconsciously Engaged in Work 

Contrary to Public Interests: criminal classes, 
ii. Persons in Unhealthful or Hazardous Occupations: child- 
laborers; women working under unsuitable conditions. 

b) Dependency 

The Unemployable: defectives; degenerates; invalids; per- 
sons temporarily ill or disabled. 

c) Idleness 

i. The Unemployed 
ii. The Voluntarily Idle 



THE PRODUCTIVE PROCESS 21 

d) Inadequate Occupation 

The Imperfectly Employed: uneducated persons; persons in 
occupations unsuited to their capacities, as a result of ignorance, 
thoughtlessness, conventions, or lack of opportunity; dilettanti. 

Questions 

1. Analyze the causes for the different forms of waste above 
indicated, and point out in each case promising means of reform. 

2. Is a waste of labor power involved in (a) the care of the sick ? 
(b) the care of persons too young to work ? (c) the care of persons too 
old to work ? {d) compulsory school attendance ? (e) premature 
death? (/) miHtarism? {g) debauchery? 

3. A recent investigation showed that deaths from consumption 
amounted to 36 per cent of all deaths among stone cutters, and to but 
6 . 2 per cent among workers on farms. What is the reason for the 
difference ? Can the evil be remedied ? 

4. The deaths from accidents in Pennsylvania coal mines for the 
ten years 1899-1908 reached a total of 9,937. In lUinois, in the same 
ten years, 1,391 deaths in coal mines were recorded, and 5,423 cases 
of injury, which caused an average of 53 days of disability to each 
of the men who ultimately recovered. Precautions against such 
disasters would be costly for mine owners. Would they be more 
costly to society at large than the accidents which now occur ? 

5. Of the 29 millions of people working in the United States it is 
estimated that over half a million annually are killed or crippled — 
a greater total than that of the killed and wounded on both sides in 
the Japanese-Russian war. Would it be well to supplement the 
peace movement by an equally serious attempt to lessen the risks of 
industry ? 

6. A competent authority estimates that "the actual economic 
saving annually possible in this country by preventing needless 
deaths, needless illness (serious and minor), and needless fatigue, is 
certainly far greater than one and a half billions, and may be three or 
more times as great." In view of the fact that the minimum estimate 
here given amounts to about three times the total ordinary annual 
receipts of the federal government, and rather exceeds the annual 
aggregate value of exports from the United States, should you regard 
the conservation of human energy as a less important economy than 
the preservation of forests, water-power, or mineral lands ? 

7. European statistics indicate that the average length of life has 
roughly doubled since the sixteenth century. Consider the economic 
saving involved. Has the limit of improvement been reached ? 

8. What judgment, considering the matter from the point of view 
of production, is to be passed on an idle rich man ? 



22 OUTLINES OF ECONOMICS 

9. Are the members of the leisure class presumably persons of 
greater or less capacity than the average man or woman ? How much 
does society lose by their idleness ? 

10. Is it possible to tell by a man's earnings whether he is (a) 
destructively employed ? (b) imperfectly employed ? 

11. Does the fact that many persons go to college for social 
opportunities, rather than to fit themselves for work, cause them to 
be more or less imperfectly employed than they would otherwise have 
been? 

12. Can you demonstrate that it would be to the economic advan- 
tage of the community at large if every workman received such wages 
as should enable him to work at maximum efficiency — i.e., to produce 
the largest possible output relatively to the cost of his maintenance ? 
Is such a result actually attained ? Why ? 

13. Cite instances in which the competitive system tends (a) to 
increase the waste of human energy; (b) to prevent such waste. 

4. The Increase of Population 

a) Natural Increase 

b) Immigration 

The theory of population has commonly been discussed as if it 
were essentially the explanation of the number of laborers, because 
the supply of labor has some relation to the total population. In 
deference to that usage it is introduced at this point; though properly 
the problem of population is much broader and involves not only 
man as a producer but also man as a consumer. 

Populations are increased (a) by excess of births over deaths, or 
natural increase, and {b) by excess of immigration over emigration. 

a) Natural Increase 

i. The Problem of Numbers 
ii. The Problem of Quality 



i. The Problem oj Numbers 

Questions 

1. State in your own words the Malthusian theory of population. 

2. When was Malthus' Essay on the Principle of Populatiofi pub- 
lished? Was the increase of population greater cause for concern 
then than now ? Why ? 

3. Point out the relation between the Malthusian theory and the 
law of diminishing returns from land. 



THE PRODUCTIVE PROCESS 23 

4. What are positive checks ? preventive checks ? How has the 
relative importance of these two classes of checks changed since 
Malthus wrote ? 

5. What is the standard of living? Does the standard of living 
affect the birth-rate ? How ? Does it affect the death-rate ? How ? 

6. Should you expect the practice of preventive checks, for eco- 
nomic reasons, to be most effectual among the poor, the classes of 
moderate means, or the rich ? 

7. Statistical investigations of the birth-rates in the richest and 
the poorest quarters of a number of cities have indicated that the 
birth-rate among the very poor is commonly from three to five times 
as high as among the very rich. What economic explanations of this 
phenomenon can you suggest? What other social factors may help 
to explain it ? 

8. Is there any present danger of overpopulation, in general ? 
locally ? 

9. Does the phenomenon of "race suicide" disprove the Mal- 
thusian theory ? 

10. Try to restate the essential idea of the Malthusian theory in a 
form which you believe is true today. 

ii. The Problem oj Quality 

Questions 

I. The following figures are based on recent vital statistics of 
graduate classes in one of the large American universities: 

Year of Graduation Number Graduated Sons Born 



1875 


142 


123 


1880 


175 


145 


i88s 


193 


129 


1890 


302 


180 



Are these university graduates maintaining their own numbers in 
the population ? Is the fact a cause for apprehension ? Why ? 

2. In general, is it disadvantageous for society that the educated, 
successful, and well-to-do classes should be characterized by a com- 
paratively low marriage-rate and an extremely low birth-rate ? Why ? 

3. Can strictly hereditary human characteristics be distinguished 
from the influences of parental example, education, and the en\dron- 
ment in general ? In the interest of social reform is it important 
that we should be able to make the distinction ? Why ? 

4. The new science of eugenics "deals with those social agencies 
that influence, mentally or physically, the racial quahties of future 
generations." In practice, eugenic reform may attempt primarily 



24 OUTLINES OF ECONOMICS 

either (a) to encourage the increase of the best elements in the popu- 
lation, or (b) to prevent the increase of the worst. Which policy 
seems to you more likely to be successful ? 

b) Immigration 

Migration — the redistribution of population — includes internal 
migration (as in the case of persons leaving the country for the city), 
and also the migration over sea, or across national boundaries, which 
we call emigration and immigration. Immigration, notably con- 
spicuous in the United States, calls for special comment at this 
point because of its bearing upon American labor conditions. 

Questions 

1. Name the more important motives by which persons are 
(a) caused to leave the country of their birth; (b) attracted to other 
countries. 

2. Give examples from the experience of this country of types of 
immigrants whose coming has been due to the several causes indicated 
in your answer to the preceding question. 

3. Explain the great fluctuations of the movement of immigrants 
to the United States since 1820. 

4. What great change in the prevailing character of our immigrants 
has occurred within the last generation ? 

5. It is argued that cheap immigrant labor is like machinery — 
an added aid in production which relieves the (native) laboring 
class from heavy and disagreeable toil. Is the analogy true ? 

6. Why do so many employers oppose restriction of immigration ? 
Is such opposition in accord with the interests of society in general ? 

7. Why is the immigration of the Chinese subject to special 
restrictions ? 

8. What currents of internal migration have been observable in 
the United States? 

9. Studies of the populations of great cities in Europe and Amer- 
ica have shown that ordinarily nearly three-fourths of city-dwellers 
between the ages of 25 and 55 are persons born elsewhere. Consider 
how this evidence of the drift of population toward cities bears upon 
the problem of distributing throughout the United States our foreign 
immigrants, over 85 per cent of whom enter the country at New York, 
Boston, Philadelphia, and Baltimore. 

10. Would restriction of immigration be justified if the congestion 
of immigrants in cities and along the seaboard could be prevented, 
and the foreign elements distributed over the whole country ? 



THE PRODUCTIVE PROCESS 25 

11. It has been contended that our population is no larger today 
than it would have been if there had been no immigration. Can 
this be true ? Tell why you answer as you do. 

12. Should immigration be prohibited ? restricted ? If restrictions 
are imposed, should they limit the number of immigrants, or fix a 
test of the quahty of immigrants, or do both ? 

IV. Capital and the Productive Process 

1 . The Definition and Function of Capital 

2. The Accumulation and Conservation of Capital 



I. The Definition and Function of Capital 

From the social point of view capital may be defined as the material 
instruments which man uses in production. The question of who 
owns these instruments or whether anyone owns them matters little. 
They may be owned by private individuals or by the state — they are 
still aids in production. From the acquisitive point of view capital is 
material goods which yield an income. This will include producers' 
goods, but also some consumers' goods. As we are now concerned 
with the productive process we shall, for the present, consider capital 
mainly from the social point of view — i.e., as producers' goods. 

Questions 

1. Make a list of things which are clearly capital. 

2. Make a list of things which are clearly not capital. 

3. Make a list of things concerning the classification of which you 
are in doubt. 

4. Are the following capital: pig iron; a plow; candy on the 
shelves of a retail dealer; a package of tobacco belonging to a laborer; 
a carriage; coal? 

5. Capital has been described as (a) future goods; {b) inchoate 
wealth; (c) intermediate products. What aspect of the function of 
capital does each of these phrases suggest? Illustrate each by two 
or three examples. 

6. Name some employment, if you can, in which labor produces 
without capital. 

7. In what sense does capital produce? Does capital yield a 
product apart from the employment of labor? apart from the use 
of land? 

8. The process of producing with the aid of capital has been 
called indirect or roundabout production. Why? 



26 OUTLINES OF ECONOMICS 

9. Why go to work to make a machine to make a machine to 
make a machine to produce a pair of shoes ? Would it not be better 
to avoid all that roundabout process and have a cobbler make them 
in the first place ? 

10. It has been said that the intention of the owner determines 
whether a thing is capital or not. Is this statement always true? 
Is it ever true ? Could a cotton mill be a consumers' good ? Sup- 
pose the owner exchanged it for a country house; would the mill then 
be capital ? 

11. "A good education is the best of investments." Is an edu- 
cated mind capital ? 

12. Should you regard as capital the trained skill of (a) an opera- 
singer ? (b) a portrait-painter ? (c) a surgeon ? (d) a stone-cutter ? 

13. Capital is subdivided into fixed and circulating capital, 
specialized and free capital. Give examples of each sort of capital. 

14. What does the business man ordinarily mean when he speaks 
of capital ? Is his view essentially different from that which is out- 
lined here ? 

15. Is money capital? 

16. Are securities capital ? 

17. State the main points of difference between capital and land. 

18. Capital has been variously defined, with reference to produc- 
tion, as (a) wealth (excluding land) devoted to the further production 
of wealth; {b) wealth (excluding land) devoted to further production; 
(c) past products devoted to further production. Which definition do 
you prefer ? Why ? Do these definitions embody the idea suggested 
by such terms as "future goods," or "inchoate wealth" ? 

2. The Accumulation and Conservation of Capital 

The creation of capital goods is due to the fact that persons, 
attracted by the superior efficiency of capitalistic production, are 
induced to forego consumption which they might have enjoyed and 
to devote to the making of producers' goods the effort that otherwise 
would have been expended in making goods for their immediate 
satisfaction. Other aspects of the accumulation of capital by saving 
will be considered in connection with the problem of the rate of 
interest. Attention is here concentrated on the economic importance 
of the accumulation and maintenance of the capital goods which 
saving makes possible. 

Questions 

I. Assuming that capital has in general been found to increase 
the efiiciency of industry, show (a) that diminution of capital regularly 
involves social loss; {b) that an individual may sometimes benefit by 



THE PRODUCTIVE PROCESS 27 

the sacrifice of capital; but (c) that such individual advantage is 
ordinarily secured at the expense of a decrease in the productivity of 
industry as a whole. 

2. Does capital— e.g., freight cars, looms, coke — literally replace 
itself ? Does it make possible its own replacement ? In what sense ? 

3. What is meant by a "replacement fund" ? What is a "depre- 
ciation charge" ? 

4. Suppose a sugar refiner decides to go into the silk-spinning 
business. Can he use his old equipment in his new factory? In 
what sense can he withdraw his capital from one industry and invest 
it in another ? 

5. In actual practice how is the amount of invested capital kept 
adjusted to the growth or decline of each branch of industry? 

6. In what ways does increase of capital conduce to the welfare 
of the laboring classes ? 

7. Should we naturally expect a great fire to increase the amount 
of employment for working-people generally ? Explain. 

8. Speaking of the Galveston flood, a writer said: "Fortunately, 
such events are not unmixed evils. Employment will now be found 
for many laborers and this benefit should not be forgotten or mini- 
mized by us." What do you think of the statement ? 

Q. Often it is said that extravagant expenditure for luxuries is 
good for industry because it "puts money in circulation." Would 
it be better for industry if the money were spent to build factories, 
instal machinery, and increase capital generally ? 

10. Is the miser or the spendthrift the more useful member of 
society ? 

V. Organization and the Productive Process 

1. Specialization 

2. The Economic Proportioning of the Productive Factors 

3. Present Forms of Industrial Organization 

4. Modern Organization Exemplified by Certain Industries 

In the discussion of Land, Labor, and Capital in their relation to 
the productive process attention was given chiefly to facts and prin- 
ciples which would hold true under practically any organization of 
society. The problem now before us is to examine the main features 
of the present organization — to see how the forces we have been dis- 
cussing are actually utilized today. This inquiry is not an inquiry 
into the wisdom or lack of wisdom of the present organization. It is a 
specific inquiry into particular facts, and into the principles which 
underlie them. 



28 OUTLINES OF ECONOMICS 

I. Specialization 

a) Specialization in Relation to Exchange 

h) The Separation of Occupations 

c) The Division of Labor 

d) Territorial or Geographical Specialization 

i. Grouping of Related Industries 
ii. Grouping of Many Plants of the Same Industry 

e) Factors Limiting the Degree of Specialization 

i. The Nature of the Industry 

ii. The Extent of the Market. (Note the relation of trans- 
portation to the extent of the market.) 
iii. Social Institutions 
iv. Financial Organization 

Questions 

1. Is any specialization of economic activity possible so long as 
every individual must supply all- his needs independently? For 
example, could the distinction between farmer and hunter, or between 
hunter and fisherman, arise under such conditions ? 

2. Does the domestic specialization according to which the 
woman cooks and weaves, while the man hunts or cultivates the soil, 
depend on exchange ? 

3. Can you think of anyone today who engages in every kind of 
work necessary to produce the commodities which he uses ? 

4. Why can more be produced by a given number of persons if 
each devotes himself to a special operation ? 

5. Do the advantages of specialization apply to the use of capital 
and land as well as to the employment of labor ? 

6. Give examples from your own observation of (a) the division 
of labor; (b) territorial grouping of related industries; (c) territorial 
grouping of plants of the same industry. 

7. What were the motives that led to the specialization you have 
mentioned in answering (b) and (c) under Question 6 ? 

8. Give concrete examples of cases where specialization is limited 
by the nature of the industry itself. 

9. Can specialization be carried as far in bicycle repair shops as 
in bicycle manufacturing ? Why or why not ? 

10. Give examples of specialized occupations which are made 
possible by the degree of exchange co-operation which exists within 
(a) small villages; (b) towns of 5,000 inhabitants; (c) large cities. 

11. Show specifically how specialization has depended on the 
widening of the market. 



THE PRODUCTIVE PROCESS 29 

12 Is it in general more true that widening markets have led to 
specialization, or that the increased productivity of speciahzed 
industry has enlarged markets ? r • 1 • 

1 1 Now-a-days one machine completes the process of pm-makmg 
which in Adam Smith's day occupied ten men. Has there been an 
increase or a decrease in specialization ? , ^ r 

14 What new forms of speciaUzation and what enlargements ot 
the market accompanied the transition from the handicraft system 
to the factory system? ^ / n j + 

15. Show how specialization of industry m respect to (a) products 
and {b) location is related to the development of transportation. 

16. Cite instances where social institutions affect the degree ot 

speciaHzation. . . , r 4. a 

17 How has the increasing economic freedom of women reacted 

upon specialization ? What further changes may be expected ? 

18. Show the relation of financial organization to the extent ot 

speciaUzation. 

2. The Economic Proportioning of the Productive Factors 

The question of the proportioning of the productive factors is 
simply a question of the law of return. Up to the present time the 
law of return has been discussed in its application to land alone. 
It is now to be noted that this law is one of general application, in 
discussing it the following distinctions must be considered: 

a) What conditions are assumed as regards methods ? 

i. Unchanged methods (static laws of return) 
ii. Progress (dynamic laws of return) 

b) Are we employing measures of number and quantity, or of 
value, 

i. As regards the product? 
ii. As regards the productive factors ? 

Questions 

1 A market gardener has been cultivating a lo-acre plot with the 
aid of 6 men and an appropriate outfit of tools. Suppose that with 
the same land and the same tools he were to set at work 10, or 50, or 
100 men. Would the crop increase in proportion to the increase 
in the number of laborers ? Would it remain as before— i.e., in pro- 
portion to the unchanged land and tools ? 

2 Suppose the gardener continued to employ 6 men on his land 
but doubled, or increased a hundred fold, the equipment of tools. 
Would the crop increase in proportion to the increase in equipment ? 
Would it remain unchanged? 



30 OUTLINES OF ECONOMICS 

3. Suppose the gardener continued to employ 6 men with the origi- 
nal outfit of tools, but increased his acreage to 25, or 100, or 1,000 
acres. Would the crop increase in proportion to the increase of 
acreage ? Would it remain unchanged ? 

4. Assuming that the gardener was originally cultivating his land 
mtclhgently, what should he do to double his crop ? 

5. The phenomenon of diminishing returns (or of increasing 
returns, as the case may be) is said to be essentially dependent on the 
proportion of the productive factors. Explain. 

_ 6. Devise an illustration of (a) increasing returns from a spinning- 
mill; (b) diminishing returns from the labor of a given gang of 
stokers on a steamship. State the conditions of each illustration 
(i) without reference to money value; (2) in terms of money value. 

7. Are diminishing returns synonymous with reduced profits ? 

8. Is the principle of diminishing returns disproved by the fact 
that the per capita product of industry is greater today than two 
hundred years ago ? 

3. Present Forms of Industrial Organization 

a) Forms of Business Organization 

b) The Size of the Most Efficient Unit 

a) Forms of Business Organization 
i. The Individual Firm 
ii. The Partnership 
iii. The Corporation 
iv. Co-operative Enterprise (treated under "Social Reform") 

Questions 

1. What are the chief points of difference between a corporation 
and a partnership ? 

2. Why was it that the corporation did not become a common 
form of business organization until the nineteenth century ? What 
were the usual forms of organization before that time ? 

^ 3. What advantages has a corporation as compared with a partner- 
ship ? Are there any respects in which a partnership has advantages 
not possessed by a corporation ? 

4. What is a holding company? What are the advantages 
afforded by this form of organization ? What are its objectionable 
features ? 

5. What are the main points of difference between a share of 
stock and a bond? Why is a bond generally considered a safer 
investment than a share of stock ? 



THE PRODUCTIVE PROCESS 31 

6. Define common stock, cumulative preferred stock, mortgage 
bond, collateral trust bond, income bond, refunding bond, coupon 
bond, registered bond. 

7. Where and how does a corporation secure a charter? What 
provisions does the charter ordinarily contain ? 

8. A corporation has outstanding $1,000,000 of 5 per cent mort- 
gage bonds, $10,000,000 of 7 per cent preferred stock, and $10,000,000 
of common stock. Gross annual earnings are $11,950,000; total 
expenses for the year are $9,900,000, and depreciation of the plant 
amounts to 10 per cent on a valuation of $11,000,000. What is 
the amount of net earnings, and how will this amount be distributed 
among the holders of the different securities ? 

9. In the case of the corporation described in the preceding 
question what would be the effect upon the dividends on the common 
stock if all the preferred stock were converted into 5 per cent mort- 
gage bonds ? Would this be a wise move if the business were likely 
to fluctuate so that the net earnings of the corporation would be cut 
in half ? 

10. In 1896 the following situation existed: 

Company Common Stock Dividends 

A $3,000,000 10 per cent 

B 2,000,000 8 per cent 

C . 1,000,000 10 per cent 

On January i, 1897, a holding company, D, absorbs all their stock, 
and in 1897 D gets, in addition to the former earnings, $500,000 
monopoly profits and $100,000 by saving the wastes of competition. 
What dividends could D pay if its capital stock were 6,000,000? 

b) The Size of the Most Efficient Unit 

Questions 

1. Is it Ukely that large factories will ever be devoted to portrait 
painting? Give reasons. 

2. For which of the following articles is large-scale production 
appropriate: hand-made shoes; machine-made shoes; jewelry; 
nails, cut glass; orchids; millinery; mowing machines? 

3. Edison proposes to develop a method of housebuilding by 
pouring cement into a. system of structural molds which may be used 
over and over. Are such houses likely to be in demand ? Why ? 

4. Generalizing your answers to the preceding questions, what 
classes of products are likely to be produced on a large scale ? 

5. The following are sometimes claimed to be advantages of large- 
scale production: {a) saving of cross-freights; {b) running plants to 



32 OUTLINES OF ECONOMICS 

full capacity; (c) economies in advertising; (d) utilization of by- 
products; (e) saving in expenses of administration; (/) employment 
of high-grade technological experts and managers; (g) development of 
foreign markets; (h) use of highly specialized machinery; (i) control 
of patents; (j) maintaining a private insurance-fund. Classify 
these alleged advantages, showing the relation of each to (i) large- 
scale production, as attained in a single large plant; (2) combination, 
i.e., unified control of severaj plants in different localities; (3) monop- 
oly; (4) integration of industry, i.e., uniting of consecutive processes. 

6. Are there any disadvantages in large-scale production ? 

7. Do you understand that all businesses are destined to become 
large-scale businesses ? 

8. The gains due to large-scale production are sometimes called 
"increasing returns," and on this ground it has been said that agri- 
culture is normally marked by diminishing returns, manufacture, 
by increasing returns. Are the advantages named in Question 5 
true instances of increasing returns? 

9. Give examples of the integration of industry in (a) mining; 
(b) manufacturing; (c) selling. 

4. Modern Organization Exemplified by Certain Industries 

a) Agriculture 

b) Transportation 

c) Manufactures: Large-Scale Industry — the Trusts 

No attempt is made at this point to treat the conditions of modern 
organization comprehensively. Agriculture, railroads, and the trusts 
form by no means an exhaustive list. Labor unions, employers' 
associations, co-operative associations, etc., are also examples of 
organization but are reserved for discussion elsewhere. The present 
discussion is designed to cover merely a few illustrative cases. 

a) Agriculture 

This industry is properly called one of our basic industries. It 
is the source of most of our food supply and also of many of our raw 
materials for manufactures. American manufacturing is in fact to 
a considerable extent a working-up of agricultural produce into such 
form (e.g., flour) as can more economically be transported and sold 
in a wide market. In interpreting figures showing the value of manu- 
factures of the United States one should therefore remember that a 
large proportion of the total value is to be referred to the raw agri- 
cultural products which constitute the material for manufacture. 



THE PRODUCTIVE PROCESS 33 

Questions 

1. The rural population of the United States was 87.5 per cent 
of the total population in 1850; 83.9 per cent, in i860; 79.1 per 
cent, in 1870; 77.4 per cent, in 1880; 70.8 per cent, in 1890; and 
66.9 per cent, in 1900. What is the reason for the decline? Do 
the figures show an absolute, or only a relative falling off of rural 
population ? 

2. What causes make it possible for the percentage of our popula- 
tion engaged in agriculture to decrease steadily ? 

3. Why have many people left the farms for other pursuits? Is 
this migration likely to continue ? 

4. What reasons can you assign for the fact that large-scale 
production is not a characteristic of this industry? Do you* think 
that the scale is likely to be increased in the future ? 

5. Agricultural experts tell us that by using present amounts of 
labor, land, and capital according to the most efficient plans of agri- 
cultural organization already known, the productive efficiency in this 
industry could be doubled in a year. Why is this not done ? What 
forces -are making in this direction ? 

6. Do you think the forces of custom, habit, and inertia are 
stronger in agriculture than in other pursuits ? 

7. What do you think the agricultural colleges accomplish in the 
improvement of agricultural methods ? 

8. Explain how land that sold for $2 per acre when it would 
produce 75 bushels of com, can now sell for $100 per acre when it 
produces only 40 bushels. If this is characteristic of our agricultural 
land, has this natural resource increased or decreased ? 

9. When good means of transportation opened up markets for 
the produce of the western pioneers, what changes took place in 
agricultural organization ? 

10. Under what conditions are we apt to have diversified farming ? 
single-crop farming ? 

11. Can you say whether the tendency of American farming is 
toward or away from extreme specialization ? 

12. Give examples of the "integration of industry" in agriculture. 

13. Why were there no immense wheat farms when the Middle 
West was first settled ? Why did they appear later ? Why are they 
being broken up today ? 

14. Why is agriculture in Europe more intensive than in the United 
States ? 

15. What inventions and innovations have improved the con- 
ditions of farm life in recent years ? 



34 OUTLINES OF ECONOMICS 

b) Transportation 

i. Transportation in General 
ii. Railroad Transportation 



i. Transportation in General 

Questions 

1. Mention commodities in the production of which transportation 
is the chief factor. Can you think of commodities in the production 
of which transportation is insignificant ? 

2. Bituminous coal which costs roughly $i per ton at the mines 
in southern Illinois costs about $2 at Chicago. The superior coal of 
West Virginia, which costs $1 or slightly less at the mine, sells for 
about $3 in Chicago. How do you explain this enhancement of price ? 
What does it suggest with reference to the location of industry ? 

3. Enumerate as many as possible of the means used for the 
transportation of goods in this country. 

4. A package of goods is shipped from London to Chicago. The 
freight charges are: for the ocean transportation from London to New 
York, $2, and for railroad transportation from New York to Chicago, 
$1. But the consignee pays 50 cents for cartage in New York and 
50 cents for delivery in Chicago, and gives 25 cents to the porter who 
carries the package upstairs at the destination. Why is it necessary 
to pay nearly a third of the total expense for carrying the goods a 
thousandth part of the total distance ? 

5. Before the Erie Canal was constructed, the hauling of a ton 
of wheat over the roads from Buffalo to New York cost $100. As 
facilities for transportation improved it was found that a horse could 
draw on a turnpike three times the load, and in a canal-boat twenty- 
five times the load which he could draw on ordinary earth roads. 
Today steam transportation permits the profitable shipment of wheat 
from the far West to Liverpool. Why do earth roads and horse- 
drawn canal boats continue to be used ? 

6. What accounts for the present revival of interest in waterways 
in this country ? 

7. How has the development of transportation methods in general 
influenced (a) the scale of industry? (b) speciaHzation ? (c) distri- 
bution and concentration of population? 

8. Are local famines likely to be as serious in the future as they 
have been in the past ? 

9. It has been contended that improved means of transportation 
have tended (a) to equalize conditions of living in different parts of 



THE PRODUCTIVE PROCESS 35 

the world; (b) to better the living conditions of the lower classes. 
Do you agree ? 

ii. Railroad Transportation 

(a) The Development of Railroad Transportation 

(b) Characteristics of the Railroad Industry 

(c) Railroad Rates 



(a) The Development of Railroad Transportation 

Questions 

1. Show how the development of railroad transportation in the 
United States has been influenced by (a) the inventions of the multi- 
tubular boiler and the forced draft; (b) coal supply; (c) cheapened 
production of steel. 

2. The early railroad construction in this country was of a flimsy 
and temporary character. Has that fact hindered or aided advance 
in railway methods ? 

3. Illustrate by examples the effect of the following factors on 
the location of railroads: (a) watercourses; (b) mountains; (c) cli- 
matic conditions; (d) seaports. 

4. Have American railroads in general followed or directed the 
course of settlement of the country ? 

5. Has railroad transportation relieved or aggravated the problem 
of great cities ? 

6. Has the American railroad in greater degree benefited the 
Dakota farmer or the London consumer ? 

7. The efficiency of modern railroad transportation is attested 
by the example of a certain American railroad which is said to haul 
freight at an average cost of one mill per ton-mile. Should you 
regard it as worth your while to carry a ton of goods a mile for a tenth 
of a cent ? How is the railroad able to do it ? 

(b) Characteristics of the Railroad Industry 

Questions 

1. Is the importance of capital, as contrasted with labor, greater 
or less in the railway industry than in industry in general ? 

2. Is the capital of railroads predominantly fixed or circulating ? 
specialized or free ? 

3. Railway competition assumes a great variety of forms. Show 



36 OUTLINES OF ECONOMICS 

how the business of a railroad might be threatened by the competi- 
tion of (a) a parallel railway line; (b) a roundabout railway route; 
(c) ocean navigation; (d) inland waterways; (e) rival inland cities; 
(/) rival seaports. 

4, Can a railroad readily withdraw from a region in which com- 
petition has become too severe ? 

5. What advantages do railroads derive from (a) large scale of 
operation, as such? (b) combination of parallel lines? (c) con- 
soHdation of connecting lines ? (d) control of terminals, docks, etc. ? 



(c) Railroad Rates 

The problem of the determination of railroad rates — i.e., the prices 
charged for the services of railroads — is here presented for discussion 
before the subject of price-determination in general has been reached. 
The study of rates, however, so clearly reveals some of the economic 
characteristics of the railroad industry that certain general aspects 
of rate-making are taken up at this point. 

Questions 

1. If a railroad between New York and Chicago is already in 
existence and trains are running, what added cost would the railroad 
incur if it hauled a five-pound box from Chicago to New York ? 

2. Would it be good business policy for the road to haul such a 
box at a rate only a little in excess of this added cost if it could get 
no more for the service ? Would it be good policy to haul all traffic 
at such rates ? 

3. Suppose empty cars were being hauled in a certain direction. 
Would a railroad be justified in offering to haul traffic in that direction 
at very low rates ? If so, under what circumstances ? If not, why 
not ? Would your answer be the same from a social point of view as 
from the point of view of the railroad management ? 

4. Explain the distinction between direct cost and indirect cost. 
Can you think of any circumstances under which it would be wise 
(a) from the railroad's point of view, {b) from the social point of view, 
for a railroad to charge less than direct cost ? 

5. In the following analytical table of railroad expenses (dividend 
payments not considered) the figures of column III, showing the per- 
centage of total expenses chargeable to each specified class of expendi- 
tures, are divided in such a way as to indicate how much in each 
instance must be paid out regardless of the volume of traffic (column 
I) and how much bears a relation to the volume of traffic (column II). 



THE PRODUCTIVE PROCESS 



37 





I 


II 


III 




Independent 
of Volume 
of Traffic 


Dependent 
on Volume 
of Traffic 


Total 


Fixed charges 


25 


O 


25 




General operating expenses 


3 

lO 

7 
14 

34 


O 
6 

7 

28 

41 


3 
i6 


Maintenance of way and structures 


Maintenance of equipment 


14 

42 

75 


Conducting transportation 


Total operating expenses 




Total 


59 


41 


lOO 







From a study of the above table should you expect a railroad to 
fight strenuously (a) to keep traffic ? (b) to gain new traffic ? Why 
do you answer as you do ? 

6. The following table illustrates how a lo per cent increase in 
traffic, with no change in rates, may increase dividends 122 per cent: 



Before the 
Increase in Traffic 



After the 
Increase in Traffic 



Volume of traffic represented by 100 no 

Gross revenue represented by 100 1 10 

Operating expenses (66 . 7) of which 

(a) . 5 are not affected by increase of traffic 33 . 3 33 .3 

(b) . 4 are affected only by a large increase of traffic 26.7 26.7 

(c) . I is affected by small increase of traffic ... . 6.7 7.4 

Fixed charges 25.7 25.7 

Total cost (operating expenses plus fixed charges). ..92.4 93 . i 

Available for dividends 7.6 16.9 

What do you think wotild have been the result if there had 
occurred a 10 per cent decrease of traffic ? Suppose prices of mate- 
rials, labor, etc., rose at the same time that traffic increased. Should 
the road be allowed to increase its rates ? Can you answer this on 
the basis of the data above given ? 

7. Sometimes it is argued that not cost of transportation but the 
value of the service rendered by transportation should determine the 
rate. How is the value of the service to be determined ? 

8. Work out a concrete case in which "cost of service" gives no 
guidance in rate-making. Do the same with reference to "value of 
service." 

9. Formulate a statement of what "charging what the traffic will 
bear" means. 

10. Rates on California and Florida fruits are made such as to 
enable these fruits to compete even in each other's territory. Cali- 



38 OUTLINES OF ECONOMICS 

fornia lemons are similarly enabled to compete with lemons from 
Sicily. Lumber from Oregon competes in Boston with lumber from 
Maine. How can these things be done? Does the practice of 
quoting such rates benefit (a) the fruit-grower and the lumberman ? 
(b) the consumer ? (c) the railroad ? 

11. A certain railroad runs between two seaboard cities which are 
also connected by competing railway and steamship lines. Between 
intermediate points on its own line it has a monopoly of the freight 
traffic. Under these circumstances might it actually charge more for 
the short haul between two intermediate points than for the longer 
haul between the terminal cities ? Why ? Is such charging of higher 
rates for the shorter haul objectionable ? 

12. Suppose you were a trafiic manager and a shipper came to 
you with a commodity recently brought into market, asking you 
to name a rate. What conditions should you need to take into 
account ? 

13. What is meant by discrimination in rate-making? Describe 
as many forms of discrimination as you can think of. 

14. Is there any objection to the practice of selling goods cheaper 
in large quantities — e.g., cigars at 10 cents each, 3 for a quarter? 
Is it wrong for a railroad to sell a monthly commutation ticket at 
less than thirty times the single-trip rate? Why is it wrong for a 
railroad to quote special rates to a corporation which agrees to make 
large and regular shipments ? 

15. The cost of transportation is often an almost negligible 
element of the total cost of an article. For example, the transporta- 
tion-cost of assembHng at St. Louis the materials for a pair of shoes 
is I J cents; and the average cost of shipping the finished shoes to 
their destination is from 2 to 3 cents per pair. In such a case is it 
worth while to question whether the railroad rate is reasonable or 
not? 

16. State the principal provisions of the Interstate Commerce 
Act and its amendments. 

17. It has been said that the most serious defect of the Interstate 
Commerce Act is the attempt to prohibit, at one and the same time, 
discriminations and pooling. Explain. 

18. If the competition of railroads were unqualified by open or 
secret agreements to maintain rates, would competition by itself 
be sufficient to assure reasonable railway rates? 

19. Why does the competition of railroads so often force them into 
receiverships and reorganization ? 

20. Are the economic problems of the railroad business essentially 
different from the problems of any modern industry in which indirect 
costs make up a large part of total cost ? 



THE PRODUCTIVE PROCESS 39 

c) Manufactures: Large-Scale Industry — the Trusts 

i. The Origin of the Trust Problem 

ii. The Trust Movement in the United States 
iii. The Promotion and Organization of a Trust 
iv. Analysis of the Causes of the Growth of Trusts and the Results 
of the Trust Organization 

V. The Lines of Procedure in Dealing with the Trust Problem 



i. The Origin of the Trust Problem 

Monopolies of one form or another have existed from the earliest 
times, but the present-day trust and the problems to which it gives 
rise are essentially modern. The industrial world is always changing 
— ^is in a constant process of evolution. The changes in the industrial 
world have been taking place so rapidly that our laws, business 
ethics, and social institutions have fallen behind and have become 
antiquated. The consequent maladjustment is the cause of many of 
our present-day economic problems — among others, the trust problem. 

Fundamentally the trust is the product of that stage in the evolu- 
tion of industrial society which ushered in what is commonly called 
modern capitalistic industry. The movement began in England, 
where it became known as the Industrial Revolution, and later, 
through a slow evolution rather than revolution, spread to the other 
more advanced nations. Improvements in transportation and many 
mechanical inventions worked together to bring in the factory system, 
with a constantly enlarging scale of production and ever-increasing 
severity of competition. The characteristics of this capitalistic 
industry were first manifested in the railroad business, but soon 
they appeared in other industries. Among the more important of 
these characteristics are the following: 

a) The corporation, which facilitated the gathering together and 
direction of the vast sums of capital now required for successful 
business undertaking, became the dominant form of business organi- 
zation. Under the corporate form of organization there appears a 
growing separation between investors and those who control the 
investment, thus affording the latter opportimity for manipulation, 
"high finance" methods, etc. This is especially marked in the 
holding company — the most common form of organization among 
the trusts. 

b) Localization of industry became more and more marked with 
the greater division of labor. 

c) Integration of industry went hand in hand with larger scale of 
production. 



40 OUTLINES OF ECONOMICS 

d) Fierceness of competition increased as the size of a concern 
expanded and the number of rivals decreased. 

e) CentraUzation of control was hastened by the growing severity 
of competition and the hope of saving its great attendant wastes, 
and of gaining, in addition, monopoly profits. 

Out of these conditions came the modern trust. 

Questions 

1. Explain carefully why each of these characteristics of modern 
capitalistic industry should lead to the growth of trusts. 

2. What is a trust? 

3. Are all trusts monopoUes? Are all monopolies trusts? Is a 
trust necessarily a corporation ? a partnership ? an association ? 

ii. The Trust Movement in the United States 

The trust movement in the United States may be divided into 
three periods according to the form of organization which dominated 
in each: 1870-80, pools; 1880-90, trusts (trustee control); 1890- , 
corporations, holding companies. 

Up to 1897 the number of trusts was comparatively small. Most 
of the existing trusts were formed between 1898 and 1902, when 
industrial and financial conditions were especially favorable to their 
formation. Since 1902 the movement has been much slower. 

Questions 

1. What is a pool? a trust (in the original sense of the term)? 
a holding company ? 

2. Why were the pool and the trust abandoned and the holding 
company adopted ? 

3. Is the movement toward combination still going on? Is it 
likely to continue in the future ? 

iii. The Promotion and Organization of a Trust 

Questions 

1. What is the function of a promoter? 

2. Explain the steps by which a trust is organized. 

3. What is meant by the capitalization of a corporation? 

4. What is meant by : (a) capitalization on the basis of original cost 
of production ? {h) capitalization on the basis of cost of reproduction ? 
(c) capitalization on the basis of earning capacity ? {d) capitaHzation 



THE PRODUCTIVE PROCESS 41 

on the basis of expected earning capacity? (e) capitalization on the 
basis of cash contributed? (/) capitalization on the basis of tangible 
assets ? 

5. What is stock- watering ? Why is it resorted to? Is it prac- 
ticed only by the trusts? 

6. Does stock-watering harm the public? the purchasers of the 
watered stock ? the creditors of the corporation ? 

7. What difference is there between the act of a corporation 
which floats stock at par with a capitalization based on earning 
capacity, and the act of an individual who sells a prosperous business 
at a high figure because of its being prosperous ? 

8. Would the evils of stock-watering be prevented by full pub- 
licity ? 

9. Explain the work of the underwriter. 

iv. Analysis of the Causes of the Growth of Trusts and the Results of 
the Trust Organization 

The main causes of the growth of trusts may be stated as — 

a) The advantages of large-scale production. 

h) The prospect of obtaining exorbitant monopoly profits 

(i) 3y control of selling price 

(2) By superior strategic position in bargaining, e.g., with 
the seller of material or with labor, etc. 

c) The saving of the wastes of competition, e.g., the better 
adjustment of production to demand, saving in advertising, 
etc. 

The following have been minor causes: 

d) Special privileges, e.g., railway rebates, tarifif favors, patent 
rights, etc. 

e) Methods of competition, e.g., factor agreements and discrimi- 
nating prices. 

f) Promoters' profits, made in organizing trusts. 

Questions 

I. The following classification of monopolies has been made by 
Bullock: 

a) Personal abilities 
h) Legal monopolies: 

(i) Private, as patents, copyrights, etc. 
(2) Public, as postal business, fiscal monopolies, etc. 
c) Natural monopolies: 

(i) Control of raw material. 



42 OUTLINES OF ECONOMICS 

(2) Consumption limited to locality of the plant, e.g., gas, 
railways, etc. 
d) Capitalistic monopolies, agreements, pools, etc. 
Does this classification satisfy you? Can you give an example of 
each kind of monopoly here distinguished? Might it be contended 
that capitalistic trusts are "natural"? 

2. "The trust is efficient from the social point of view." Why or 
why not ? 

3. Which of the alleged advantages of large-scale production 
mentioned in Question 5, p. 31, above, are to be obtained without 
monopoly ? 

4. " The trust carries the germ of its own destruction. The alleged 
advantages of large-scale production are fictitious and the savings 
of the wastes of competition are more than offset by the wastes of 
monopoly. Abolish special privileges and improper methods of 
competition and the trust will die of itself." Do you agree? Why 
or why not? 

5. Is the tariff the "mother of trusts"? To what extent is it 
responsible for the trusts ? 

6. Would the abolition of the tariff destroy trusts or result in 
the formation of international trusts? 

7. In what ways does the granting of railroad rebates foster the 
growth of trusts ? 

8. Certain of the trusts allow an extra discount from the prices 
of their products to retailers who agree not to sell the goods of any 
other manufacturer. Is this practice of "factor agreements" objec- 
tionable ? Why ? 

9. How does the practice of discriminating prices favor trusts? 
Is this practice confined to the trusts? 

10. Do trusts tend to raise prices? By what methods can this 
be determined? 

11. How do trusts affect the position of the laborer in bargaining 
for the sale of his labor? 

12. Are there social or political evils which follow from the growth 
of trusts ? 

v. The Lines of Procedure in Dealing with the Trust Problem 

Questions 

1. Enumerate the evils for which the trusts can be held responsible. 

2. What elements of good, if any, do you see in the trusts? 

3. Under the circumstances should the trusts be abolished, be 
let alone, or be regulated? 



THE PRODUCTIVE PROCESS 43 

4. What has been the policy underlying the trust legislation of 
this country in the past, and what has been accomplished ? 

5. Why has not more been accompUshed? Was the policy a 
wise one ? 

6. What can be accomplished by potential competition ? Do you 
think potential competition is an adequate solution of the problem ? 

7. What other remedies have been suggested ? Do you believe 
them to be adequate ? 

8. Do you think it would be wise to attempt to regulate the trusts 
by methods analogous to those used in regulating the railroads? 

9. If you were to attempt to regulate the trusts in such a way 
as to strike at the special causes of the special evils to which they 
give rise, what remedies should you suggest? 

10. May any of the evils of "high finance" commonly attributed 
to the trusts be more properly regarded as characteristic of corpora- 
tions as such? If so, which? 

11. What remedies should you suggest for some of these evils 
of corporations ? 



E. EXCHANGE 

I. Markets 

II. Value 

III. The Mechanism of Exchange 

IV. International Trade 



We have seen that the modern industrial society is an exchange 
society. In this section we shall study the exchange processes in more 
detail, or, speaking more accurately, we shall study industrial society 
with especial reference to exchange. There is, of course, no clear 
line of demarkation between exchange and the productive process; 
for the production of a good is not complete until, through exchange, 
it is brought to the consumer, and has attained its full utilities of 
time and place. Nor are exchange and the distributive process 
strictly separable. With such intricate, interacting, and complex 
phenornena it is, however, good scientific method to take first one 
point of view and then another, and finally to seek to deal with the 
matter as a whole. 

I. Markets 

We have come to assume "market" as a factor in our industrial 
life. We make goods "for the market"; we "go to market"; we 
"study the market"; we speak of "making a market" or "spoiling 
the market." These expressions could be multiplied indefinitely. 
We must consider precisely what the term "market" means. 

Questions 

1 . When people congregate at a certain place and exchange goods 
by barter, can we say that they constitute a market ? 

2. When you buy chickens from a farmer out in the country are 
you buying in a market ? If so, what constitutes the market ? Is it 
the place ? the operation ? 

3. Is the retail grocery store a market? For whom? Is the 
place the market ? 

4. Is the wholesale grocery store a market ? For whom ? Is the 
place the market? Suppose this wholesale grocery has no stock on 
hand but consists merely of an office, an office force, and means of 

44 



EXCHANGE 45 

communication with importers and producers and customers, is it a 
market ? 

5. Are the oflSce and store of the importer a market? 

6. When you speak of the tea market do you mean the retailers' 
market ? wholesalers' market ? importers' market ? 

7. Sometimes a distinction is made between a local market and a 
world market. What distinction exists ? Can you name any goods 
which have a world market ? Any which have a local market ? 
Under what conditions will goods have a local market alone ? 

8. Is a stock exchange a market ? Is a produce exchange ? If so, 
for whom ? 

9. Draw up a definition of market. 

10. Show how the market, as you have defined it, has a function 
in the industrial world. 

11. When we say we "watch the stock market," just what do 
we mean ? 

12. Where is the market that establishes the market price of 
wheat ? 



II. Value 

1. The Nature of Value and Price 

2. Demand and Supply in Relation to Value 

3. Normal Value and Normal Price 

4. Analysis of Demand 

5. Analysis of Supply 

6. The Marginal Utility Explanation of Value 

7. General Questions on Value 



I. The Nature of Value and Price 

The term "value" is used in many senses. In the sense of what 
is more specifically called "value-in-use" the term is practically 
synonymous with "utiHty." Sometimes the word value is employed 
with an ethical signification. But in ordinary economic usage value 
always means power in exchange. For the economist, the study of 
value is a study of the terms according to which one commodity is 
given for another, and also a study of the part that value as tiius 
defined plays in the economic process. 

Price is value expressed in terms of some one good, ordinarily 
money, taken as a standard. In our everyday experience with 
economic matters we are more likely to talk of price than of value. 



46 OUTLINES OF ECONOMICS 

Questions 

1. "Whiskey is not wealth. It has no permanent value for 
society." In what sense is the term value used ? 

2. "It was a valuable lesson for me." In what sense is the term 
value used ? 

3. A mercantile establishment advertises "the best values in 
the city." What is meant here by value ? 

4. Could a thing have value unless desired ? unless scarce ? 

5. Draw up a sentence in which the word value is used in the sense 
in which the economist uses it. 

6. Would a bag of gold have value to a shipwrecked sailor on a 
rocky and deserted island ? Would a loaf of bread ? 

7. What good is actually the standard in price calculations today ? 

8. Just what is a $5 gold piece ? If gold should go up in value, 
would the government put a different quantity of gold in the $5 
piece ? If wheat should rise in value, would there still be 60 pounds 
in the bushel ? 

g. If for any reason the value of gold should fall, what would 
happen to prices ? 

ID. Could X change in price and still have the same value relation 
to a,h, and c that it had before ? 

11. Can there be a general rise or fall of values as the economist 
uses the term ? 

12. Can there be a general rise or fall of prices ? 

13. If prices fall, is the general wealth of the country any less? 
Are there as many articles of value as before prices fell ? 

14. Is value an absolute property of things? Is the expression 
"intrinsic value" defensible — 

a) As an expression meaning the value of the substance of 
which a thing is made: e.g., "The intrinsic value of a 
silver dollar is 47 cents" ? 

h) As an expression signifying that value is inherent in a thing ? 



2. Demand and Supply in Relation to Value 

The answer to the questions " Why does so much of this commodity 
exchange for so much of that? Why not for more? Why not for 
less ?" is to be found in the relationship existing between demand and 
supply. 

Demand and supply are terms of which the general meaning is 
more or less apparent, but which are by no means easily defined with 
accuracy. The detailed discussion of demand and supply is taken 
up in sees. 4 and 5, below. Provisionally, we may reckon demand 



EXCHANGE 



47 



in terms of the quantity of a good which will be purchased at a given 
price, and take supply to mean the quantity which will be offered for 
sale at a given price. 

By experience of market conditions one may with some approach 
to accuracy predict how many units of a good would be demanded 
in a community at each of several possible prices. Suppose, for 
example, 



At 


IOC. 


per 


lb. 


there would be taken 


50 lbs. 














(C 




(C 




9C. 














70 




8c. 










u 




100 " 




7C. 










(( 




150 " 




6c. 










(< 




250 " 




5c. 










ii 




400 " 




4C. 










n 




600 " 




3C. 










i: 




900 " 




2C. 










<( 


" I 


,500 " 




IC. 










i( 


" 2 


,500 " 


This tabular 


statement 


would 


then 


constitute 


a demand schedule. 


If the same data ^ 


svere 


plotted graphically they would give a demand 


curve. 


















Again, suppose that 












For 


IC. 


per 


lb. 


there would be supplied 


olbs. 




2C. 














" 




3C. 














50 " 




4C. 














100 " 




5C. 














400 " 




6c. 














1,000 " 




7C. 














1,500 " 




8c. 














1,800 " 




QC. 














2,000 " 




IOC. 














2,100 " 



This tabular statement would constitute a supply schedule. The 
corresponding graphic representation would give a supply curve. 

Questions 

1. Under the conditions of demand and supply stated in the above 
schedules, at what price per pound would the demand for the com- 
modity be equal to the supply ? 

2. Can you establish that this price is the market price which 
will prevail under the assumed circumstances ? 

3. Show why, under the assumed conditions, the price could not 
be 4 cents or 6 cents per pound. 



48 OUTLINES OF ECONOMICS 

4. Can there be more than one price for a given commodity in the 
same market at the same time ? Why or why not ? 

5. Plot on one piece of paper the curves representing the conditions 
of demand and supply tabulated above, using the same axes and the 
same scale for both curves. What point is common to the two curves ? 
What does this signify ? 

6. Will doubling the demand for a good double its value ? 
(Doubled demand means demand for twice as much as before at 
each given price.) 

7. If prices vary with demand and supply, how is it possible for 
a store to maintain fixed prices for many commodities ? 

3. Normal Value and Normal Price 

The value which is actually fixed by the competitive conditions of 
purchase and sale of any commodity is called market value. Market 
price is market value expressed in terms of money. 

Contrasted with this actual, observed market value (or market 
price) is normal value (or normal price) — the ideal value (or price) 
which might a priori be expected to prevail in the long run. 

Normal value, in its superficial aspect, is an average value, above 
and below which momentary market values fluctuate. Regarded 
more analytically, it is a standard or characteristic value, typical for 
a given commodity and for the industrial and commercial conditions 
of a given period, but progressively changing, over longer periods, 
with the drift of economic change. This latter interpretation of 
normal value can be more successfully taken up later in connection 
with "Cost of Production," 

Questions 

1. Cite instances where market price remains the same over con- 
siderable periods of time. Cite instances where market price fluctu- 
ates rapidly, 

2. A shopkeeper advertises fabrics at 39 cents a yard, "worth 
75 cents"; umbrellas at $1.98, "value $3"; and handkerchiefs, 
"regular 50-cent quality," at 3 for $1. Can you explain these state- 
ments in terms of market price and normal price ? 

3. Under what circumstances might a flower-vendor at a street- 
corner sell flowers for less than normal price ? Under what circum- 
stances might he sell for more than normal price ? 

4. Would a bad crop affect the market price of corn ? Would it 
affect the normal price ? 

5. Would the following influences disturb (i) the market price, 
(2) the normal price, of the commodities respectively concerned: 



EXCHANGE 49 

(a) Late frosts in a fruit-growing region; {b) demand for mourning in 
a European capital following the death of the Sovereign; (c) a week 
of hot weather during an ice-famine; (d) destruction of local timber- 
supply by forest fires; (e) discovery of a method of making artificial 
diamonds, indistinguishable from the natural stones ? 

6. Why does the price of wheat in the United States generally 
fluctuate between certain rather definite limits ? Why does it not 
rise to $10 a bushel ? Why does it not fall to 10 cents a bushel ? 
Why does it fluctuate at all? 

7. Might farmers accept 3 cents a quart for strawberries some- 
times? Do you think they could accept as little as this for every 
quart they sold and still remain in the business ? 

8. Could normal price be determined in the case of a commodity 
in the production of which much machinery is used; especially if 
improvements of the machinery are being rapidly and continually 
invented and applied in new plants or in the newer machines of 
established plants ? 

4. The Marginal Utility Explanation of Value 

In recent years the doctrine of marginal utility has been much 
used as an explanation of value. It has been severely criticized, 
but an exposition of che doctrine is justified by (a) the point of view 
it contributes; (b) the fact that the student in his reading is certain 
to meet with the terminology of this doctrine. 

Marginal (or final) utility is the utility of the last or least impor- 
tant increment of supply. The term final utility is suggested by the 
diminishing utility of successive units of a good. 

The principle formulated by the ''marginal utility theorists" 
may be put as follows: 

The market price of a commodity is determined by the valuation 
of the marginal purchasers, i.e., those who would refuse to purchase 
if any increase in price took place. To these purchasers the marginal 
utility of the commodity is just equal to that of the money required 
to purchase it. Thus it is frequently said that market price is deter- 
mined by marginal utility. 

If the conditions of supply were to change, another set of pur- 
chasers would be placed in the marginal position, and would determine 
price by their valuations. 

It is obvious that the above statement of the marginal utility 
explanation of value is in complete accord with the demand and 
supply theory. That theory does not deny that those purchasers 
who are ready to drop out when prices rise are in a position to exert 
a direct influence upon price. The demand and supply theory lays 



50 OUTLINES OF ECONOMICS 

emphasis upon the entire volume of demand; it takes for granted 
variability of part of the demand. The marginal utility theory lays 
emphasis upon the variable part of the demand; the existence of a 
large unvarjdng demand is taken for granted. 

Questions 

1. Is marginal utility the utility of the last unit supplied? If all 
the units of a good were simultaneously supplied how should you 
define marginal utiUty ? 

2. According to the marginal utility theory of value how can you 
explain (a) the high price of diamonds ? (b) the low price of drinking 
water ? 

3. Does the marginal utility theory make allowance for (a) cost 
of production ? (b) normal value ? 

4. "The marginal utility theorists ignore supply and attempt to 
explain value in terms of demand alone." Comment. Is marginal 
utility independent of supply ? 

5. Define: marginal buyer, marginal seller, marginal producer, 
marginal cost. 

6. When two men bargain to fix the price of an article do you 
imagine they are conscious of estimating marginal utility ? 

7. If you were deciding whether to spend three dollars for a 
dinner or to use the same money for a cheaper dinner and some new 
neckties, would your choice be determined by considerations of 
marginal utility ? 

5. Analysis of Demand 

a) Meaning of Demand 

b) Determinants of Demand 

c) Certain Characteristics and Special Forms of Demand 

In sec. 2 above it was seen that the forces which determine values 
and prices work themselves out through demand and supply. The 
further investigation of demand, and of the forces which go to make it 
up, was temporarily deferred. This investigation will now be resumed. 

a) Meaning of Demand 

Questions 

1. Can one speak of the amount demanded independent of value 
or price ? 

2. Does mere desire for a commodity constitute demand ? 

3. Does the penniless, hungry tramp "exercise demand" for 
bread in the bakery ? 



EXCHANGE 5i 

4. Does fictitious demand ever influence values? What are 
"wash sales"? Why do they take place? 

b) Determinants of Demand 

i. Desire 

ii. Effectiveness of Desire— Purchasing Ability 
iii. Persons Affected 

i. Desire 

(i) Individual Determinants of Desire 

(2) Social Determinants of Desire 

First of all, if a good is to be demanded it must have utility. Men 
desire it because it will contribute to the satisfaction of wants. _We 
must therefore in this connection revert for a moment to the subject 
of the nature of wants. The student should review the questions on 
"The Characteristics of Wants." 

(i) Individual Determinants of Desire 

Questions 

1. Does the intensity of one's desire for a unit of a certain com- 
modity depend upon the number of units one already has ? How ? 

2. A desires a tennis racquet. So does B. Assummg that 
neither has a racquet at present, does it follow that A's desire and 
B's desire are equally intense? Is there any way of telHng which 
desires the racquet more urgently? 

3. A and B also desire tennis balls. Assuming that for three 
tennis balls the desire of A and the desire of B would be equal, does 
it follow that A would feel the same desire for six, or for a dozen, 
that B would? 

4. A benevolent person gives a jack-knife to each of several small 
boys. The jack-knives are alike, but apparently some of the boys are 
much more pleased by the gift than others. Reasoning from your 
answers to Questions 1,2, and 3, what explanations could you suggest ? 

5. If a wealthy woman were offered the choice between a diamond 
and an ordinary loaf of bread, which would she choose? Why? 
Are diamonds more necessary than bread ? Is it not likely that the 
woman in question actually possesses more diamonds than loaves of 
bread at the moment ? 

6. It has been stated that the desire which influences value is 
not the desire for a commodity, such as bread, in general, but the 
desire for some particular unit of the commodity. Explain the 
significance of this distinction. 



52 OUTLINES OF ECONOMICS 

7. Is it the real or the supposed qualities of a good which influence 
demand ? 

8. How does advertising affect demand? Does it create new 
desires, or cause a desire for one brand of goods rather than another ? 

(2) Social Determinants of Desire 

The influence of social organization on methods of production has 
been pointed out. Social usage exercises an equally fundamental 
influence on the tastes and habits of consumers, and therefore on the 
desire for goods. 

Questions 

1. Do goods tend to be less valuable when out of style? Why? 

2. What distinction do you make between necessities and luxuries ? 

3. Is good food a necessity? Is a dress suit a necessity? Does 
a man ever try to live on less or worse food than considerations of 
health would suggest, in order to buy a dress suit ? Why ? 

4. Goods which are required by social custom rather than by the 
necessities of physical existence are called conventional necessities. 
Give examples of conventional necessities. 

5. What is the difference between luxuries and conventional 
necessities ? Can you give examples of luxuries which have become 
conventional necessities ? 

6. Will people buy the same things regardless of the neighborhood 
in which they live or the social circle in which they move ? 

7. Food and clothing as such are usually reckoned as necessities. 
Are the actual forms of food we eat and the styles of clothes we wear 
necessities ? Can you mention any article of dress which is without 
trace of luxury or convention ? Try to distinguish necessities from 
luxuries and conventional necessities in a table d'hote. 

ii. Effectiveness of Desire — Purchasing Ability 

Objective demand cannot be based upon desire alone. In an 
exchange process, purchasing ability or effectiveness must accompany 
the desire. 

Questions 

1. Does purchasing ability imply the possession of that which we 
call money? 

2. What is meant by saying that a person can demand only 
when he supplies ? 

3. Can a man be a consumer and yet not be a producer? 

4. Is a general over-production possible ? 



EXCHANGE 53 

5. "The destruction of wealth has one compensation in that it 
increases demand for goods." Comment. 

6. "Demand in general would be increased if employers would 
raise wages." Would this increase the total output of products? 
Would it increase total demand? Would it cause a different dis- 
tribution of demand ? 

7. A rich man, for recreation, cultivates a vegetable garden and 
supplies his own household with vegetables. Is he likely, on this 
account, to make fewer purchases (a) of the local vegetable dealer ? 
(b) of tradesmen in general ? 

8. The daughter of a well-to-do family, desirous of having an 
occupation and an independent source of support, goes into the busi- 
ness of artistic bookbinding. Does this work hardship for poor 
bookbinders who need money? Does it injure working people in 
general ? 

9. It is argued that if articles produced by convict labor are put 
on the market, honest men will be deprived of work. Comment. 

10. Does total demand equal total money? If all money were 
wiped out of existence would demand disappear? 

11. Can an individual buy more than he sells in the long run? 

12. The irrigation projects of the federal government are opening 
up for settlement large tracts of land that were formerly desert. 
Will the settlement of these tracts increase the demand for products 
of other parts of the country ? How should you proceed to determine 
the extent of this increase, if any? 

13. "Demand for a good is made up partly of the supply of other 
goods." Why or why not? 

14. It seems to be clear that the effectiveness of a man's desire 
depends (at least in part) upon his ability to offer something in 
exchange. Will it also depend upon his willingness to offer this 
something? If so, upon what will this willingness depend? 

15. Does advertising increase the aggregate demand for goods in 
general or does it merely cause a redistribution of demand ? 

16. Is desire or purchasing ability the more fundamental factor 
in demand ? 

iii. Persons Affected 

The relation between the number of persons affected and the total 
demand is really a matter of the extent of the market and is so obvious 
as to require no extended treatment. As regards the different types 
of individuals represented, and the corresponding variety of wants 
and purchasing abilities involved, the problem is more complex, and 
can here be only briefly touched upon. 



54 OUTLINES OF ECONOMICS 

Questions 

1. Construct a demand curve showing the* demand of a typical 
family for cream. 

2. How would the form of the curve be changed if the demand of 
10,000 such families were taken in the aggregate and the curve were 
drawn to the same scale as before ? 

3. Draw up three different schedules of individual demand for 
candles. Plot a curve representing the aggregate demand of the 
three schedules. Interpret the result. 

Note. — A schedule or curve of aggregate demand represents the total demand 
at different prices for a given commodity in a given communitj' or market. If 
the figures showing aggregate demand in the schedule are divided by the number 
of individual schedules fused together; or if the horizontal scale of the curve 
(representing quantity demanded) is reduced in corresponding proportion, the 
result will in cither case be a sort of average individual demand schedule from 
which the idiosyncrasies of the actual individual schedules are eliminated. But 
such an average does not represent any real instance of demand, and cannot 
properly be used to exemplify diminishing utility or elasticity of demand (see 
below), independent of other factors. 

c) Certain Characteristics and Special Forms of Demand 

i. Elasticity of Demand 

ii. Alternative Demand: The Principle of Substitution 
iii. Derived Demand 
iv. Composite Demand 

V. Joint Demand 

i. Elasticity of Demand 

Demand may be elastic or inelastic, i.e., the amount demanded 
may change readily or slowly with change of price. 

Questions 

1. Does the principle of diminishing utility manifest itself more 
markedly in the case of some goods than in the case of others ? Give 
specific instances. 

2. Is elasticity of demand associated with gradual or with abrupt 
diminution of utility as the amount of the good consumed is increased ? 

3. Is the demand for the following elastic or inelastic: diamonds, 
salt, tobacco, beef, shoes, manual labor ? 

4. If hearses were to fall in price would there be an increase in 
the number demanded ? 

5. Is the demand for water elastic or inelastic when the water is 
desired for (a) drinking ? (b) cooking ? (c) washing ? (d) watering 
the lawn ? (e) running a water-motor ? 



EXCHANGE 55 

6. May the demand for a given commodity be elastic at one price- 
level and inelastic at another ? Illustrate. . , • , i 

7. Draw up schedules illustrating elastic and melastic demand. 

Plot them. ,. , . , . , 

8. Is demand elastic in the case of a commodity which is so cheap 
that the users are near the point of satiety ? r , j j 

o Name some familiar commodity the elasticity of the demand 
for which varies markedly according as the purchaser is wealthy, 
poor, or of moderate means. Illustrate this phenomenon by con- 
structing three demand curves, representing the character of the 
demand of the wealthy, the poor, and the moderately well-to-do, 
respectively. 

10. Does advertising affect elasticity of demand.^ ^ 

11. Draw up a series of general statements or propositions defining 
the circumstances under which demand will be elastic. 

12. Suppose a sudden doubling of the amount of all kinds ot 
c^oods (by a miracle, if you choose). Would values be affected? 



11. 



Alternative Demand: The Principle of Substitution 



Questions 

1. Name some want that can be suppUed almost equally well by 
two different commodities. 

2. Does the availability of a satisfactory substitute ever affect 
the desire for a good ? Give examples. 

3. Is any one article of food a necessity of hfe so long as other 
kinds of food may be had ? r , ^ 

4. How does this principle affect (a) the utility of the first unit 
of any given good ? (6) the diminishing utility of successive units ? 

5. Does elasticity of demand depend upon the ease with which 
one commodity may be substituted for another? 

6. Would the high price of meat affect the consumption of other 
kinds of food ? If the tariff on woolens were removed, would other 
kinds of clothing lose their present market ? If barley should rise in 
price would more corn be used than formerly ? 

7. If a field is well suited to wheat-growing, and only passably 
good for oats, are there condirions under which it will be devoted 

to oats ? f 1 1 u 

8. Is there any substitute for physical labor? for mental labor.'' 

9. If labor in China rose to $1.50 a day the demand for capital 
would be likely to increase. Why? 

10. Work out the effects, in the way of substitution, of the exhaus- 
tion of our anthracite coal deposits. 



56 OUTLINES OF ECONOMICS 

iii. Derived Demand 

Very commonly the demand for a commodity is a derived demand. 
Producers' goods afford examples. Our demand for them is really 
derived from our demand for their products. Some persons call this 
a case of derived value. Demand and supply still determine value; 
but the demand in this case is of the kind indicated. 

Questions 

1. Mention several concrete instances of derived demand. 

2. Is demand a derived demand in the cases of plows, threshing 
machines, wheat, flour, bread? 

3. Is the demand for labor a derived demand ? Would the same 
be true of the demand for land and for capital ? 

4. Would you pay more for a bushel of wheat than for the 
products which can be made from it ? Why ? 

5. Could you say that the demand for property which yields an 
income is derived from the demand for the income ? Does this 
suggestion throw light on the valuation of investments? 

6. A certain bond pays 5 per cent interest on its par value of 
$1,000. If the prevailing rate of interest on similar security is 4 
per cent, how much would an investor pay for the bond, assuming 
that it will continue to pay interest indefinitely ? If the bond were 
due to mature in ten years would it sell for less or more ? Why ? 

7. How could you determine the price you should ask for a piece 
of agricultural land which you own ? 



iv. Composite Demand 

Demand takes at times the form of composite demand; i.e., one 
thing is wanted for many purposes. Thus corn is wanted for bread, 
for stock feeding, for starch manufacture, for glucose, and for the 
distilling of alcohol. 

Questions 

1. Give six other examples of composite demand. 

2. Could a commodity be subject to an elastic demand for one 
purpose or want, and to an inelastic demand for another purpose — 
all at the same price ? 

3. Is demand a composite demand in the case of (a) machinery 
in general? (b) printing-presses? (c) labor in general? (d) services 
of coachmen ? (e) land in general ? (/) Wall Street lots ? (g) materials 
in general ? (h) bricks ? (i) cotton ? 



EXCHANGE 57 

4. What significance, in this connection, attaches to the dis- 
tinction between (a) specialized and free capital? (b) skilled and 
unskilled labor? (c) improved and unimproved land? 

V. Joint Demand 

Joint demand exists in case the demand for one good involves 
in practice a demand for another also. 

Questions 

1. What commodities are demanded jointly with (a) cement ? 
(b) nails? (c) cameras? (d) flour? 

2. Give six other examples of joint demand. 

3. How would cheapening of automobiles affect the demand for 
gasoline ? 

4. Is demand a joint demand in the case of (a) machinery? (b) 
raw material ? (c) land ? (d) labor ? 

5. Are many cases of joint demand also cases of derived demand ? 

6. Should you expect to pay as much for a barrel of flour as for 
the bread which can be made from it? Why? 

6. Analysis of Supply 

a) Meaning of Supply 

b) Determinants of Supply 

c) Certain Special Forms or Manifestations of Supply 

The following analysis of supply is supplementary to the brief 
treatment of demand and supply in sec. 2, above, and parallel to 
the extended investigation of demand in sec. 4. 

a) Meaning of Supply 

Questions 

1. Can one speak of the amount supphed independent of value 
or price ? 

2. Does the mere existence of a commodity constitute supply? 

3. Does "supply" mean actual supply, or potential supply, or 
both? 

4. Does the supply of a commodity ever exceed the amount 
actually in existence ? Consider the case of sales of cotton or grain 
for future delivery. 



58 OUTLINES OF ECONOMICS 

b) Determinants of Supply 

i. Cost of Production, Simplified Treatment 
ii. IndelermiiKitc Cost of Production 
iii. Physical Limitation of Supply 
iv. Monopolistic Limitation of Supply 
V. Social Determinants of Supply 



i. Cost of Production, Simplified Treatment 

(i) Uniform Cost per Unit of Product : " Constant Cost " 
(2) Different Costs for Different Units of Product 

The term "cost of production" is used by different writers in 
different senses. It may mean either (a) the effort and sacrifice 
involved in production, or (b) the money outlay for wages, interest, 
materials, taxes, etc. — i.e., the expenses of production, ordinarily paid 
by the entrepreneur. Each usage has its advantages; but the second 
will ordinarily be followed in this book, on the ground that expenses 
afford a more tangible and more familiar measure of cost than does 
sacrifice. 

Throughout the discussion of cost of production, competitive 
conditions are assumed. 

(i) Uniform Cost per Unit of Product: "Constant Cost" 

Questions 

1. Is a manufacturer likely as a regular policy to sell his goods for 
less than cost? Under competitive conditions is he likely regularly 
to sell for more than cost, reckoning as part of the cost a minimum 
of return to the manufacturer himself, without which he would not 
remain in the business ? 

2. In the following schedules what will the price be, assuming 
cost of production to be the only determinant of supply ? 



Units 


Cost of rroduction 
per Unit 


Demand Schedule A 


Demand of Schedule B 


100 


$1 


100 at $4 each 


I SO at $3 each 


200 




200 at 3 " 


17s at 2.50 " 


300 




300 at 2 " 


200 at 2 " 


400 




400 at I " 


300 at 1 . 50 •' 


500 




500 at 7SC. " 


500 at I " 


600 




600 at 50c. " 


700 at 75c. 


700 




700 at 40c. " 


1,000 at 60c. " 



EXCHANGE 59 

3. Assume cost of production to be the sole determinant of supply. 
Construct a supply cur\^e to represent the case of goods increasable 
at constant cost, and show that whatever demand-curve be drawn 
to intersect it the market price indicated by the intersection will be 
the same. 

4. "No matter what the market fluctuations may be, in the long 
run cost of production will be the significant thing to watch in the 
case of these commodities." Why or why not ? 

5. Do concerns ever sell below cost of production? If so, why? 
Could they continue to do so ? 

6. Does cost of production influence market price? Does it 
influence normal price ? 

7. What does "cost of production" mean when appUed to the 
case of a commodity on which practically all the work of design and 
execution has been done by one person ? 



(2) Different Costs for Different Units of Product 

(a) "Increasing Cost" 

(b) "Diminishing Cost" 

The production of some commodities is subject to conditions of 
increasing cost — i.e., a larger supply is more than proportionally 
costlier than a smaller supply. Other commodities can be produced 
more cheaply in large quantities than in small. It is to these facts 
that the terms "increasing cost" and "diminishing cost" apply. 
They do not refer to gradual changes brought about by progress in 
industrial technique, or by slow exhaustion of the soil. 

Questions 

1. Assume cost of production to be the sole determinant of 
supply. "The marginal-cost theory is absurd. Suppose w'heat is 
selling for 70 cents a bushel. A farmer who produces at an average 
cost of 50 cents will net 20 cents per bushel and will therefore be 
under strong incentive to increase his crop, even though its marginal 
cost is 70 cents. Thus, average cost and not marginal cost is the 
significant thing." Why or why not ? 

2. "No matter what the market fluctuations may be, in the long 
run cost of production under the worst circumstances, or marginal 
cost, will be the significant thing to watch in the case of these com- 
modities." Why or why not? 

3. Assume cost of production to be the sole determinant of supply. 
What will the price be in the following case ? 



6o 



OUTLINES OF ECONOMICS 



SoppLV Schedule 


Demand 


SCHEDtTLE 






Additional 






Number 


Total Cost 


Cost due to 


Price per 


Number 


Supplied 


Additional 


Unit 


Demanded 






Unit 






7 


$231 


$36 


$36 


IS 


8 


268 


37 


37 


14 


9 


306 


38 


38 


13 


lO 


345 


39 


39 


12 


II 


385 


40 


40 


11 


12 


426 


41 


41 


10 



4. Assume cost of production to be the sole determinant of supply. 
Draw a curve of increasing cost. Draw a demand curve on the same 
diagram. Double your demand. What is the effect upon price ? 

5. Is "increasing cost" the same phenomenon as diminishing 
returns ? 

6. "In the case of goods produced under conditions of diminishing 
cost, value will tend toward the lowest cost, in so far as this lowest 
cost can be realized in the making of all of the product demanded. 
In so far, however, as it is necessary at any time to depend for part 
of the supply on production at a higher cost, the case resembles the 
case of increasing cost, and values tend to adjust themselves to the 
marginal cost, or cost of production under the worst circumstances." 
Assuming cost of production to be the sole determinant of supply, 
is this statement correct ? Explain. 

7. Draw a curve representing diminishing cost. Regarding this 
as a supply curve, draw a demand curve intersecting it. Draw 
another curve representing doubled demand. How does doubling the 
demand affect the price ? 

8. Draw a figure to show that when supply is governed by con- 
ditions of diminishing cost the supply and demand curves may 
intersect in two or more points. Which intersection will represent 
normal value ? Show how elasticity of demand affects this problem. 

9. The decrease of costs in manufacture as a result of the superior 
efficiency of large-scale production has often been called "increasing 
returns." Is this a correct use of the term ? Give a clear instance of 
increasing returns in manufacture. 

ii. Indeterminate Cost of Production 

(i) Direct Cost and Indirect Cost 

(2) Joint Cost 

(3) Effects of Progress in Methods of Production 

(4) Appreciation and Depreciation 



EXCHANGE 6i 

Under the complex conditions of modern industry the determi- 
nation of costs is an extremely obscure and difficult problem. The 
following questions suggest some of the difficulties involved. 

(i) Direct Cost and Indirect Cost 

Questions 

1. Explain what is meant by direct cost and indirect cost, using 
illustrations taken from the railway industry. 

2. Explain the terms prime cost, supplementary cost, fixed 
charges, overhead charges. 

3. Would it be good policy to continue operating a cotton-mill 
if the earnings were insufficient to pay (a) dividends? (b) regular 
interest on borrowed capital ? (c) cost of materials ? (d) wages ? 

4. If employers paid wages at a fixed rate per hour, regardless of 
the time worked, would it be just as profitable to run a factory 6 
hours a day as to run it 10 hours ? Why ? 

5. Why are night shifts of workmen employed in many factories? 

6. A newspaper with a circulation of 90,000 is printed on a press 
designed to handle an edition of 100,000 copies. How would the 
cost per copy be affected by increasing the edition to (a) 95,000? 
(b) 150,000? 

7. Try to point out important economic problems of the day that 
are in large measure due to the way in which heavy fixed charges 
afifect the character of competitive industry. 



(2) Joint Cost 

Questions 

1. A family employs a coachman who works at odd moments in 
the vegetable garden. Assuming that the coachman would be 
employed in any event, how should you estimate the cost of raising 
the vegetables ? 

2. Suppose you were a farmer, engaged in ordinary general 
farming. Could you tell how much it cost (a) to fatten a hog for 
market ? {b) to raise a heifer ? (c) to cultivate pumpkins between the 
rows of corn ? 

3. Is there a fairly well established market price for hogs, or 
heifers, or pumpkins ? Is there a normal price ? If so, how can it 
have been fixed ? 

4. Can you determine the actual cost of butter or wool? 



62 OUTLINES OF ECONOMICS 

(3) Effects of Progress in Methods of Production 

Questions 

1. "Every time a new type of machine is installed jn a factory 
the cost of producing the product manufactured there is in some 
degree reduced." Comment on this assertion. 

2. Should you accept as true the statement that on the whole 
the cost of production of manufactured articles is gradually but 
steadily falling ? If so, can you explain why ? 

3. It is sometimes said that not cost of production, but what it 
would cost to reproduce a commodity, is the real cost-factor in sup- 
ply. What is the meaning of this distinction ? Is the point well 
taken ? 

4. In a factory the old machinery, as it wears out, is gradually 
replaced by machinery of the latest improved pattern. Consequently, 
some of the machinery at any one time in use is superior to the rest 
of the equipment. Under such conditions, how is cost of production 
reckoned ? 

5. At a given time the supply of cotton cloth is derived from (a) 
new and up-to-date plants; (b) obsolete plants; (c) progressive 
plants, with some old machinery and some new machinery. All these 
plants are working to their full capacity. Which cost of production 
will be significant in determining the price of the cloth ? 

6. Should you expect the price of an article to correspond to the 
cost of production of that part of the supply which has cost most 
to produce, or to the cost of production of some less costly part, 

a) when reduced cost results purely from enlarging the output 
of established plants without changes of method or equip- 
ment? 

b) when reduced cost results from construction and utilization 
of larger plants ? 

c) when reduced cost is the consequence of successive improve- 
ments of machinery and methods, available in small plants 
as well as large ? 

(4) Appreciation and Depreciation 

Questions 

1. A fruit grower, after laborious precautions against insects, 
black-knot, etc., markets a scanty crop of plums from young trees 
which have not begun to bear their full yield. How can he separate 
the cost of this crop from the cost of subsequent crops? 

2. A landowner clears a tract of land which he then sells at an 
advanced price. He also sells firewood from the trees removed in 



EXCHANGE 63 

the process of clearing. How much of the cost of clearing is to be 
reckoned as the cost of production of the firewood? • 

3. What factors must be considered in determining the cost of 
production of (a) timber ? {b) iron ore ? (c) petroleum ? 

4. Assuming that a manufacturer who invests in machinery plans 
to get back, out of the earnings of the machine during its time of 
service, the original outlay, with interest, how is he to know what 
proportion of this is to be charged as cost of production against each 
unit of product ? 

5. Discuss the bearing of each of the following influences on the 
depreciation-factor in cost of production: (a) change of fashion; (b) 
invention of new processes; (c) durabihty of machinery. 

iii. Physical Limitation of Supply 

Under this head will be considered not only goods of which the 
quantity cannot under any circumstances be increased, but also 
goods of which the quantity in existence is locally or temporarily 
limited. 

Questions 

1. Suppose that as regards a certain kind of rare coin, A would 
buy one at $100; B, one at $90; C and D, one each at $80; E, F, 
and G, one each at $60. If, now, seven are to be disposed of in a 
competitive market, what will the price be ? Does cost of production 
affect the situation ? 

2. In the case of old spinning wheels what would normal price 
mean? Would cost of production have a definite relation to price 
in such a case ? 

3. What determines the price of a unique original work of ancient 
art, or of a first-edition Shakespeare? Should you agree to the 
proposition that in such cases supply is insignificant and price 
depends on demand alone ? 

4. If it takes a year to build a steel mill, will this have a bearing 
upon the value of steel mills in case of a sudden increase in the demand 
for steel ? Why ? 

5. How is it possible to corner the market in wheat? Cannot 
the supply of wheat be increased ? 

iv. Monopolistic Limitation of Supply 

Questions 

I. Can a monopolist control the demand for his monopolized 
commodity? Can he control supply? Can he control price? 
Explain. 



64 OUTLINES OF ECONOMICS 

2. Suppose a monopolist could know in advance the demand 
schedule and the cost schedule of his commodity. Where would he 
fix the price in the following case ? 

Demand Schedule Cost Schedule Profit — ? 

lo at $i,ooo lo at $500 



20 


800 


30 


700 


40 


600 


60 


500 


80 


4SO 


100 


400 



20 


460 


30 


450 


40 


430 


60 


425 


80 


420 


100 


415 



3. From the evidence of this illustration work out a general prin- 
ciple to explain monopoly price. 

4. Formulate a general statement of the relation of monopoly 
price to elasticity or inelasticity of demand. 

5. How would the general principle of monopoly price (Question 
3) be modified in the case of a commodity for which there is an avail- 
able substitute not controlled by monopoly ? 

6. How great is the power of a monopolist who deals in the neces- 
sities of life ? in the luxuries of life ? 

7. How great is the power of a monopolist who has control of 
natural resources ? 

8. "In the case of a monopolized good cost of production does not 
affect price." Comment. 

9. A piano manufacturer buys out all his competitors. Can he 
now sell the former aggregate output at an advanced price ? Why ? 

10. How effectual in restraining monopoly do you think potential 
competition is? 

11. Professor Taylor says: "The normal price of goods produced 
by a capitalistic monopoly tends to approximate the cost of produc- 
tion to outsiders, usually remaining, however, somewhat above such 
cost." Comment. 

12. Suppose that of the price charged by a monopohst for his 
product 5 per cent is profit. He now raises the price 5 per cent. 
By what percentage will this increase his profit, assuming sales to 
remain the same ? How much are sales likely to fall off in practice ? 

v. Social Determinants of Supply 

(i) Formal Social Control 
(2) Informal Social Control 

Questions 

I. Illustrate by examples various forms of legislation which 
increase or diminish the supply of commodities. 



EXCHANGE 65 

2. Mention commodities the sale of which is supervised by {a) 
the police; (6) the public health authorities; (c) the postal au- 
thorities, 

3. Does the pure food law tend to affect the supply of certain 
foods ? Why or why not ? 

4. Explain prices of theater tickets, football tickets, physicians' 
fees. 

5. Do men ever abstain from supplying a certain good because 
to supply it would cause them to lose the esteem of their fellows? 

6. Does a prohibition law which is to some extent evaded affect 
the price at which liquor is sold in the prohibition territory ? 

7. Can you cite cases where (a) custom, {h) habit, (c) ignorance 
affects the supply of goods ? 

8. Which of the above questions deal with formal social control ? 
Which with informal control ? 

c) Certain Special Forms or Manifestations of Supply 

i. Perishable Goods 
ii. Joint Supply and By-Products 
iii. Composite Supply 

i. Perishable Goods 

Questions 

1. Under competitive conditions the sellers of goods will ordinarily 
choose a favorable time to sell, and will hold back their goods if 
the market is temporarily depressed. Is the same course open to 
sellers of strawberries? Why? What is the effect on the price of 
strawberries ? 

2. Mention several commodities the perishable nature of which 
notably affects the supply. 

3. Does perishabiUty account for the low prices which prevail at 
(a) Saturday night sales of fish, vegetables, flowers ? {b) "mid-season'' 
sales of wearing apparel ? (c) bargain sales of calendars in February ? 
((f) "fire sales"? 

4. Has cold-storage altered conditions of supply of perishable 
goods? Has it made them cheaper or dearer? 

5. Has cost of production any part whatever in determining the 
price of strawberries ? 

6. Would the principle that competitive prices conform closely 
to cost of production apply to perishable goods? 

7. Should you count dealers' losses by the spoiling of goods as a 
part of normal cost of production ? 

8. It has been said that labor is a perishable commodity. What 
is meant by this statement? 



66 OUTLINES OF ECONOMICS 

ii. Joint Supply and By-Products 

Problems involving more or less of the principle of joint supply 
have already been introduced in treating of railway rates and in 
discussing Indeterminate Cost of Production. Under the latter 
head in particular are problems which closely parallel the problems 
of this section. The emphasis, however, was there laid upon cost. 
Here the topic of cost is only incidentally introduced, and attention 
is directed to the fact that supplying the market with one commodity 
often involves in practice the supplying of other, related goods. 

Questions 

1. Why is it possible to buy a beef -tongue without having to pay 
for a whole ox ? 

2. Mention as many as possible of the salable products which 
result from the killing of an ox by (a) a country butcher; {b) one of 
the great packing-houses. 

3. What other articles are supplied jointly with mutton, flour, 
cotton, kerosene, lumber, butter ? 

4. If the price of hides falls, does it follow that men will restrict 
the production of them ? 

5. Would a sudden and large increase in the demand for beef 
affect the supply of hides ? of shoes ? of harness ? 

6. Give examples of important commodities which, as by-products, 
are sold in much larger quantities and at a much lower price than 
would be possible if they were made and sold as separate, inde- 
pendent products. 

7. Is there a normal price for a by-product? 

8. Does the principle of joint supply govern the case of goods 
produced by the general farmer ? 

9. Do you think the principle is one of wide application ? Does 
it render easier or more compUcated the study of value ? 

iii. Composite Supply 

Questions 

1. Mention different sources of the supply of {a) soap; {b) glue; 
(c) paper. 

2. Give other examples of commodities of which the supply is 
derived from different materials or by different processes. 

3. Do anthracite coal, bituminous coal, and coke afford an example 
of composite supply? If coke were produced more cheaply and in 
larger quantities would the supply of bituminous coal be afifected? 
How? 



EXCHANGE 67 

7. General Questions on Value 

1. What is the value of an undetected counterfeit $10 bill ? 

2. Can you think of anything which has value and yet is not 
scarce ? Can you think of anything which is scarce and yet has no 
value ? 

3. What is the relation of utility to value ? 

4. Explain the prices fixed at an auction sale (a) in terms of 
demand and supply, (b) in terms of marginal utility. 

5. "Value is determined by demand and supply"; "value is 
determined by cost of production"; "value is determined by mar- 
ginal cost"; "value is determined by cost of reproduction"; "value 
is determined by marginal utility." Can these propositions be 
reconciled ? 

6. Does increase of demand lead to increase of supply ? How ? 
Does increase of supply lead to increase of demand ? 

7. Can we have an elastic supply? an inelastic supply? If so, 
what are the determining factors? 

8. Tell whether the demand for the following is a derived, joint, 
composite, elastic, or inelastic demand: capital; labor; land; shoes; 
wheat; flour; bread; leather; hides; steak; butter; books; pencils; 
wine; playing cards; houses. 

9. Tell of the above whether the supply is joint, composite, elastic, 
or inelastic. 

ID. Does a persoji ever pay a high price for a thing because he 
fears that if he waits for lower prices the supply will all be sold? 
Does this disprove the assumptions of the demand schedule? 

11. What is meant by the statement that "demand exceeds sup- 
ply"? Under such circumstances can a price be fixed ? Can exchange 
take place ? 

12. What do we mean by saying that a good is not produced 
because the cost of production is too high ? 

13. What is the relation of cost of production to value ? 

14. "Hot-house grapes sell for $1 a pound. By constructing 
large hot-houses and utilizing the advantages of large-scale produc- 
tion ten million pounds could annually be produced at a cost of 60 
cents a pound, thus returning $4,000,000 above all expenses." Is 
anything wrong with this argument ? 

15. Even when Raphael was alive did the value of his pictures 
depend upon the cost of production? Did he possess any natural 
monopoly ? 

16. Can the price of a commodity long remain above the cost of 
producing that commodity in an average factory? Can it remain 
above the cost to the largest manufacturers ? 

17. The cost of raising wheat on the best new lands of Canada 



68 OUTLINES OF ECONOMICS 

is said to be far below the average cost of wheat in the United States, 
Under these circumstances can the United States continue to sell 
wheat in the competitive markets of the world ? 

i8. Does not value depend upon the amount of labor expended? 
Is all labor ahke? If it were, would a great expenditure of labor 
cause a machine for blowing soap bubbles to have a high value ? 

19. If all wages were doubled, what would be the effect upon values ? 

20. Suppose commodities x and y are made out of the same raw 
material and recjuire in their manufacture equal amounts of the same 
kind of labor. Will they have the same price ? 

21. How is the general statement that (normal) value approxi- 
mates cost of production affected by (a) much fixed capital in the 
industry ? (b) speculative character of the industry ? (c) the growth 
of combination or monopoly ? 

22. Does cost of production determine the price of land in Okla- 
homa when first opened for settlement ? What does determine it ? 

23. X and y are used in making 2. How would a reduction in the 
value of X affect the value of y and z ? How would the discovery of a 
cheap substitute for z affect the value of x and y ? 

24. If there were a combination among all the buyers of a certain 
raw product what would determine the price of that product ? 

25. A trust will sometimes sell its goods below cost in a certain 
locality where there is competition and make up the loss by the high 
price obtained elsewhere. What principle should you say determined 
such prices ? 

26. A certain machine cost $2,000. It could now be duphcated 
for $1,500; but a newly invented and patented machine, wliich turns 
out 50 per cent more product in the same time with the same expense 
for power, attendance, etc., can be made for $1,000. Assuming that 
the original machine is as good as new, explain carefully what its 
value is likely to be. 

27. A publisher has printed 5,000 copies of a novel which proves 
a failure. What will determine the value of a copy (a) assuming 
that the whole edition has been bought by booksellers ? (b) assum- 
ing that most of the books are still on the publisher's hands ? 

28. Look at the commodities advertised for sale in the daily news- 
paper. Do the economic principles of value which have been out- 
lined in the preceding pages really explain the way in which their 
prices are fixed ? If not, why not ? 

29. Do these principles of value correctly explain the price of a 
newspaper, a second-hand typewriter, a glass of soda water, a street- 
car fare, a new novel, a ticket to the circus, a suit of clothes, a rail- 
road excursion ticket, hats at a fire sale, a ticket to an all-star opera 
performance, shoes at a bargain sale, a race horse ? If not, why not ? 



EXCHANGE 69 

30. What is the relation of custom and habit to value ? 

31. Look at the daily report on the wheat market in the newspaper. 
Can you see the law of demand and supply working there ? 

32. Do the government reports regarding the prospects for crops 
of wheat, cotton, etc., have any influence upon market prices? 
How? Why do merchants watch these reports more closely than 
reports or estimates of gold production ? 

^:^. Do local grain buyers fix the price of the grain they buy of 
the farmer? 

34. Can it be said that the law of demand and supply fixes the 
price of wheat when there is a corner in the market ? Does cost of 
production have anything to do with the price at that time ? 

III. The Mechanism of Exchange 

1. Money Exchange 

2. Credit Exchange 

Thus far we have dealt with markets and the establishment of 
values and prices in the market. In doing so, we have constantly 
been assuming certain media or means of exchange. Since money 
and credit devices are so familiar it was safe thus to assume them. 
Our general knowledge enabled us to use them in our reasoning. 

We must now consider in more detail this mechanism which we 
were assuming. 

I. Money Exchange 

a) The Nature and Functions of Money 

b) The Characteristics of a Satisfactory Money Good 

c) The Forms of Money 

d) The Value of Money 

e) Gresham's Law 

f) The Kinds of Standard 

Money serves as an aid in exchanging goods and provides a con- 
venient means of expressing their relative values in terms of prices. 
Credit may and commonly does perform money-work, and credit, 
as well as money, enters into price relations. The concrete applica- 
tions of credit are best studied under banking. 

a) The Nature and Functions of Money 

Questions 

1. Could we have any exchange by using barter alone? 

2, What is meant by the "double coincidence" of barter? 



70 OUTLINES OF ECONOMICS 

3. Could the exchange system be as complex as it is today if we 
depended upon barter alone? Would the productive process be as 
efficient ? 

4. Can you cite any cases of barter being used today? 

5. What difficulties of a system of barter are overcome by the 
use of money ? 

6. What is money ? Must money have value ? Has gold coin 
value because it is money or is it money because it has value ? 

7. It has been said that the functions of money are to serve as (a) 
a medium of exchange; (b) a standard (common denominator) of 
value; (c) a standard for deferred payments. Explain why each 
of these functions is useful and cite cases where money performs each 
of these functions. 

8. A buys 1,000 bushels of wheat from B at $1 a bushel, B 
accepts in payment a note for $1,000 payable with interest two years 
from date. Two years later A pays B the $1,000 with interest agreed. 
Which of the three money-functions does money perform in the 
course of these transactions? 

9. If half the money in a country were suddenly to disappear, 
would the wealth of the country be diminished? 

10. Would it be possible to have a standard of value which did 
not serve as a medium of exchange ? a medium of exchange which did 
not serve as a standard of value ? Can you find examples in the 
currency of this country ? 

b) The Characteristics of a Satisfactory Money Good 

Questions 

1. Name five commodities formerly used as money and explain 
why they were abandoned for that purpose. 

2. Would the following make good money: iron, wheat, diamonds, 
glass beads, sea shells, beaver skins ? If not, why not ? Which of 
the three chief functions of money would each be inadequate to per- 
form ? 

3. Are there any respects in which gold is superior as money to the 
above-mentioned commodities? If so, explain the superiority in 
each case. 

4. Reasoning from your answers to the above questions, what 
should you conclude are the characteristics of a good money ? Take 
up in turn the functions of money and state which of the character- 
istics of a satisfactory money-good apply to each function. 

5. Are there any respects in which gold or silver fall short of 
these desired characteristics? 

6. Is a low price level unfortunate provided it is stable ? Is a 



EXCHANGE 71 

high price level absolutely high or high by comparison? If a high 
price level is wise, how high should it be ? Why stop there ? 

7. If a change in the value of money affects all prices alike, is 
anybody injured thereby? 

8. What classes are adversely affected by a rise in the value of the 
standard ? a fall in the value of the standard ? 

g. It has been argued that a steadily depreciating standard tends 
to stimulate business. Why ? Do you think such a standard would 
be desirable ? 

10. It has been said that uncertainty concerning the monetary 
standard in this country has caused unsettled business conditions. 
Is this a probable statement ? 

11. "It is crop-moving time. Since farmers do not use checks 
very much we should have more money for a while." What does 
this mean ? Why more money "for a while" ? 

c) The Forms of Money 

i. Standard Money 
ii. Token and Subsidiary Currency 
iii. Credit Money 

Questions 

1. What is standard money in the United States? What is the 
monetary unit ? Is the unit actually current as coin, or is it a mere 
definition ? 

2. Why does not the government use pure gold and silver in its 
gold and silver coins ? 

3. What is seigniorage? brassage? 

4. In the days of the California gold discoveries different indi- 
viduals and firms coined their own gold pieces. Is there any reason 
for prohibiting such a practice and reserving the right of coinage to the 
government ? 

5. Why stamp a device on coins ? Why mill the edges of coins ? 

6. Would it sometimes be more convenient to have an order for 
a bushel of wheat than to have the wheat itself ? Answer the same 
question for a bag of 10,000 gold coins. 

7. What is token money? What purposes does it serve? Is 
token money legal tender ? Define legal tender. 

8. Why are copper and nickel used for coins ? 

9. Do you think any denominations of coins other than the de- 
nominations now minted would be desirable in this country ? Why ? 

10. Why do we have $1,000 bills in our currency system ? 

11. What are subsidiary coins ? Is there a distinction between 
subsidiary coins and token coins ? 



72 OUTLINES OF ECONOMICS 

12. Why is it necessary to put so much silver into the silver 
subsidiary coins? 

13. The United States government keeps a gold reserve of 150 
millions against 346 millions of greenbacks. How does it dare to 
keep less than 100 per cent reserve ? 

14. A bank often has outstanding current obligations to the extent 
of four or more times its cash on hand. How does it dare to do this ? 

15. What is meant by likening credit money to a road through the 
air that permits society to use for other purposes the ground formerly 
used for the road ? 

16. Copy from each of the kinds of paper money in use in the 
United States today the significant statements printed thereon. 

d) The Value of Money 

i. The Value of Standard Money 

ii. The Value of Other Forms of Money 



i. The Value of Standard Money 

The value of standard money, so long as there is free and unlimited 
coinage, depends upon the value of the money-metal used in the coin. 
The value of the money-metal, like the value of other commodities, 
is determined by demand and supply. 

Careful attention should be paid to the factors which affect the 
demand for the money-metal. The demand arises from two sources: 
(a) the demand for use in the arts, and (b) the demand for use as 
money. Obviously the latter demand is made less than it would 
otherwise be if various forms of credit are used to help perform the 
work done by standard money, or if the conditions are such that 
money circulates rapidly, so that a given piece does so much the 
more work. 

The business man in speaking of " the value of money " usually has 
ill mind the current rate of interest which can be obtained for money 
which is loaned. This should not be confused with the meaning of 
the term as it is used by the economist — i.e., the power of money in 
exchange. Since this is measured by the amount of every other 
commodity for which money will exchange, the value of money is 
indicated by the general level of prices. 

Questions 

1 . Does the demand for shoes adequately account for the value of 
leather? Could you explain the value of gold as the result of the 
demand for money? 

2. What is meant by the demand for money? 



EXCHANGE 73 

3. If Europe ceased to use gold for money would that action affect 
the value of American gold coins ? If so, how and when ? 

4. If dentists discovered a cheap filling for teeth which was better 
than gold would it tend to alter (a) the demand for gold? (b) the 
value of the gold eagle ? 

5. Should you expect the increasing use of platinum in jewelry to 
change the value of gold ? 

6. Is gold durable ? Is it ordinarily destroyed in the uses to which 
it is put ? Suggest some of the ways in which gold is so used as not 
to be recovered for subsequent uses. 

7. To what extent is the supply of gold derived from current 
production? 

8. Does the value of gold correspond to marginal cost of produc- 
tion ? How is the relation between the value and the cost of produc- 
tion of gold influenced by (a) the speculative character of gold mining ? 
(b) the amount of fixed capital involved in the production of gold ? 

9. The introduction of the cyanide process for extraction of gold 
so decreased the cost of production that refuse heaps of old mines 
were worked over again. What effects should you expect this to have 
upon the use of gold in the arts? upon its use as money? What 
would be the effect upon its value in the arts? upon its value as 
money ? 

10. A certain amount of gold can be extracted from sea water, 
yet this extraction is not generally attempted. Why not? Are 
there any conditions under which this might be resorted to ? 

11. It is said that the demand for money consists of the supply 
of goods offered for sale, and that the supply of money constitutes the 
demand for these goods. Explain. Is the validity of this statement 
affected by the use of checks and other substitutes for money ? 

12. How would the value of money be affected by doubling the 
amount in circulation ? To what extent would this result be modified 
by (a) the use of substitutes for money ? (b) the fact that one piece 
of money may effect many or few or no exchanges in the course of a 
day, according to circumstances ? Would the use of substitutes, or 
the rapidity of circulation, be affected by the scarcity of money ? 

13. What is the "quantity theory" of the value of money? 
According to that theory is the value of money independent of cost 
of production ? Explain. 

14. Can five ounces of gold set aside for use in the arts have a 
different value from the same amount of gold in a coin ? If so, why ? 
If not, why not ? Answer the same questions with reference to silver. 

15. Would a seigniorage tend to affect the value of money, and if 
so, how ? 

16. Is the value of the dollar fixed and stable ? 



74 OUTLINES OF ECONOMICS 

ii. The Value of Other Forms of Money 

Questions 

1. What must be done to keep token, subsidiary, and credit 
money equal in value to the standard ? 

2. The value of gold falls. What is the probable effect upon (a) 
the value of the $5 gold piece ? (b) the price of the $5 gold piece ? 
(c) the value of wheat ? (d) the price of wheat ? (e) the value of the 
cent piece ? (/) the value of the dime ? (g) the value of an ounce of 
silver ? (h) the value of the silver dollar ? 

3. What determines the value of the silver certificate? of the 
greenback ? of the national bank note ? 

4. Is there any difference between the value of the bullion in a 
silver dollar and the value of a silver dollar? If so, how can you 
explain it? 

5. During the Civil War the value of the greenback fluctuated 
continually. For example, after a union victory, the greenback rose 
in value. Why ? 

e) Gresham's Law 

Questions 

1. Suppose a man has borrowed a bushel of wheat of you. Let the 
government now pass a law stating that debtors may pay back 
borrowed wheat in grain of either good or poor quahty. In what 
quality do you think you are Hkely to be paid ? 

2. If you were to get some gold bullion by melting coins, should 
you melt full-weight or light-weight coins? Suppose you were 
desiring to ship gold out in international payments: which kind of 
coin should you ship ? 

3. If in bullion form one ounce of gold equals in value 32 ounces 
of silver, and by a legal tender law it is provided that the coins made 
from I ounce of gold shall exchange for the coins made from 16 
ounces of silver, should you take gold to the mint to be coined? 
Should you take silver to the mint ? 

4. Suppose the monetary system of a country is based on a gold 
standard. War is declared. The government concludes to issue 
paper money which it decrees shall be legal tender and which it 
promises to redeem after the war is over. Doubts arise whether it 
will ever be redeemed. If someone owed you, would he pay you in 
paper or in gold ? Why ? Should you have any option in the matter ? 
Would gold remain in circulation ? 

5. State Gresham's Law, and give an illustration from the mone- 
tary history of the United States of a case where it operated. 



EXCHANGE 75 

6. Is there any reason why the amount of pure metal in a 
fractional coin should be less than a corresponding fraction of the 
amount in the standard coin ? 



f) The Kinds of Standard 

i. The Single Standard (monometallism) 

ii. The Double Standard (bimetallism) 
iii. The Limping Standard 
iv. The Tabular Standard and the Method of Index Numbers 

V. The Paper Standard (fiat money) 

Several kinds of monetary standard have been adopted, at one 
time or another, by different nations; and others have been suggested. 
In deciding which standard is best the main criterion is stabihty of 
value. 

i. The Single Standard (monometallism) 

Questions 

1. Why is gold more stable in value than most commodities? 

2. Will the recent adoption of the gold standard by a number of 
countries tend to make the value of gold more stable, for the time 
being ? in the long run ? 

3. Has the production of gold been quite regular, or have there 
been great changes in the output ? What is the situation at the pres- 
ent time ? 

4. Has the money of the United States ever been based on a 
single standard ? If so, when ? 

5. Suppose a country has a gold standard. Will that mean that 
it may not have silver or copper coins ? May it have credit money ? 

ii. The Double Standard (bimetallism) 

Questions 

1. What is meant by bimetallism ? Have we ever had a bimetal- 
lic standard in the United States ? If so, when ? 

2. What is meant by 16 to i ? Has that ratio ever been adopted 
in the United States, and if so, when ? Has there ever been any other 
coinage ratio in this country ? 

3. On what ground can the bimetallist contend that bimetalHsm 
will give a more stable standard of deferred payments ? 

4. "So long as the government coins freely and gratuitously both 



76 OUTLINES OF ECONOMICS 

gold and silver at a fixed coinage-ratio of value, the market ratio 
between the value of gold and the value of silver will automatically 
conform to the coinage-ratio. If, for example, the value of silver on 
the market tends to fall, silver will be taken to the mint to be coined; 
and in consequence the tendency to a fall in the value of silver will be 
checked by the increased demand for silver for purposes of coinage; 
while at the same time the demand for gold for coining will fall off." 
Explain and criticize this argument. 

5. Would bimetaUism be more likely to succeed if the coinage- ratio 
chosen were near the existing market ratio ? Why ? 

6. Would bimetallism be more likely to succeed in a country which 
used much metal in its currency ? Why ? 

7. Precisely why would international bimetallism be stronger 
than national bimetallism? 

8. "Bimetallism is absurd. It would result first in gold mono- 
metallism, then in silver monometallism, and so on." What does 
this mean ? 

9. Is Gresham's Law Hkely to come into operation under a bimetal- 
lic standard ? If so, under what circumstances ? 

10. Is there anything in the nature of mining that keeps the ratio 
of the supply of gold to the supply of silver nearly uniform ? What 
light does the history of the output of these metals during the 
nineteenth century throw on this point ? 

11. In the last free-silver campaign some favored a coinage ratio 
of 32 to I instead of 16 to i. What was the reason for this? If 
you had had to decide between the two, which ratio should you have 
chosen ? 

12. If the United States were now to adopt bimetallism at the 
ratio of 16 to i, what changes would take place in the circulating 
medium of the country ? 

13. If the United States had free coinage at 16 to i and the market 
ratio of gold and silver were 12 to i, what would be the effect on the 
circulating medium of the country ? 

14. From 1792 to 1834 our coining ratio was 15 to i and the average 
market ratio was about 15 . 61 to i. What metal tended to go to the 
mint ? 

15. From 1834 to i860 our coining ratio was 16 to i and the 
average market ratio was about 15.63 to i. What metal tended to 
go to the mint ? 

16. What was the "crime of 1873" ? Why did the measure pass 
Congress with so little opposition at the time ? 

17. What was the specific demand of the free-silver party ? When 
did the free-silver movement arise ? Why did it come when it did 
instead of earlier — say about 1855 ? 



EXCHANGE 77 

1 8. What different classes or sections of the country wanted free 
silver ? What did they expect to gain by it ? 

19. What legislation was passed as a result of the demands of the 
free silverites ? What were the consequences of that legislation ? 

20. Is there more or less reason for the adoption of bimetallism 
by the United States now than there was about 1893? 

21. Draw up a chronology of the monetary history of this country. 



iii. The Limping Standard 

This topic requires no discussion. The term is used to express 
the situation in those countries where both metals have unlimited 
legal tender power but where only one is coined unlimitedly. It 
marks a transition from the double to the single standard. France 
and the United States furnish examples of a limping standard. 



iv. The Tabular Standard and the Method oj Index Numbers 

A change in the value of money and a change in the level of 
prices are but two ways of stating the same fact — the change in the 
exchange ratios between money and goods. The fact of the change 
implies nothing as to the cause of the change. The cause may be 
exclusively on the gold side, or exclusively on the side of the other 
goods, or it may be a cause which affects both sides. 

The statistical method of index numbers is a device for studying 
changes of price-level, which, whatever their causes, are attended with 
serious practical consequences. An index mmiber is the average of a 
series of price-ratios, or percentages, each of which represents the 
relation between the price of some particular commodity at the date 
under consideration, and the price of the same commodity at a previ- 
ous date taken as a "base," to furnish a standard of comparison. 

Questions 

1. Construct an index number based on assumed prices for a 
dozen commodities at two different periods, showing the change in 
the value of money. 

2. Why is "weighting" sometimes used in the construction of 
index numbers ? Is the correction important ? 

3. In the nineties the gold party declared that the value of silver 
had fallen in the preceding twenty-five years; the silver party declared 
on the other hand that it was not a fall in silver which had taken place, 
but a rise in gold. How should you go about it to find out the truth 
of the matter ? 



78 OUTLINES OF ECONOMICS 

4. Enumerate some of the influences which might tend to raise 
or lower the prices of a large number of commodities independently 
of any change on the part of the standard. 

5. Explain how the method of index numbers might be used in 
defining a tabular standard of payments. Do you think such a stand- 
ard would be more equitable than a gold standard in determining the 
amount of long-deferred payments? 

6. Why do business men object to this idea of the tabular standard ? 

V. The Paper Standard (fiat money) 

Questions 

1. Is it hypothetically possible that a mere paper standard could 
be more stable in value than the gold standard? (This question 
assumes that people would be wilUng to accept a paper standard.) 

2. What would fix the value of such paper money? Would it 
be determined by cost of production ? 

3. Is it true that if we used paper money instead of gold much 
social outlay would be saved ? 

4. Why not have a paper standard ? 

5. Why have some people desired it ? 

6. It is commonly said that from 1862 to 1879 the United States 
had a paper standard. Does this refer to the official or to the actual 
situation? Were people accepting the paper money because the 
government so ordered or because they expected this money to be 
redeemed in gold at some time ? 

2. Credit Exchange 

a) Credit and Credit Instruments 

b) Credit Institutions (with particular reference to banking) 

By far the greater part of the exchange transactions in such an 
industrial society as that of the United States is performed by credit 
devices. Some analysis of these devices and the way in which they 
operate is therefore necessary. 

a) Credit and Credit Instruments 

Questions 

1. Define credit. 

2. What is meant by book credits? checks? promissory notes? 
drafts ? bills of exchange ? 

3. Show how each of these credit devices may perform money 
functions. 



EXCHANGE 79 

4. Is credit capital ? Does it really add to the sum total of instru- 
ments, or does it merely make possible a better utilization of instru- 
ments already existing ? 

5. Could credit exist unless a surplus of economic goods over and 
above immediate needs had previously been accumulated ? 

6. "Credit quickens the productive process." Do you agree? 
If so, in what way does it do so ? 

b) Credit Institutions (with particular reference to banking) 

i. Principles of Banking 

ii. Clearing-House Operations 
iii. Comparison of Banking Systems 
iv. Foreign Exchange (treated under "International Trade") 



i. Principles of Banking 

Questions 

(^'^iT^tate carefully what is meant by (a) discount, (b) deposit, (c) 

2. What forms of so-called banking can you enumerate? Which 
of these forms of banking do you regard as banking in the strict 
and typical sense ? 

3. Which of the three fundamental banking functions mentioned 
in Question i are performed by (a) savings banks, (b) trust com- 
panies, (c) "bankers," in the sense of dealers in foreign exchange? 

4. On what sorts of security do banks ordinarily make loans ? 

5. What are the most desirable forms of investment for a bank ? 

6. How can a bank fail when its assets are greater than its current 
liabiUties ? 

7. "One of the main functions of a bank is to place capital with 
those who can use it best. This aids society as well as the individual." 
Explain. 

^s^^:, In what ways may a deposit account be created ? 
9. What are the relative advantages and disadvantages of checks 
an^banknotes as regards (a) convenience, {b) safety ? 

'jp: Why should any more care be taken by the government to 
protect banknotes than to protect deposits ? 

11. "An effective redemption scheme is all that is needed to secure 
either notes or deposits." Do you agree ? 

12. "A bank should be free to give the community it serves the 
kind of service desired. If deposit currency is desired, let the bank 
have freedom in giving that service. Let the same be true of circula- 



8o OUTLINES OF ECONOMICS 

tion." What is meant by deposit currency ? by circulation ? Do you 
agree with the quotation ? 

13. "A bank wishes a strong reserve," "A bank wishes as small 
a reserve as possible. A reserve is idle money." Can these state- 
ments be reconciled ? 

14. "The government could justly tax bank issues 5 or 6 per cent. 
In the United States banks buy bonds and collect the interest on 
these bonds. They issue notes on the basis of these bonds and get 
interest on the notes also. Thus they make a double profit and so 
are favored over other businesses." Do you agree ? 

15. On which side of a bank statement should the following items 
go: overdraft, expenses, unclaimed dividends, certified checks out- 
standing ? Explain why in each case. 

16. Bank X has the following items in its account: 

Loans and discounts $380,000 Capital $100,000 

Bonds and stocks 21,000 Surplus 20.000 

Real estate 12,000 Undivided profits , , 8,000 

Notes 50,000 Deposits in other banks 40,000 

Deposits 350,000 Cash items 10,000 

Other assets 15,000 Specie and legal tender 50,000 

A) Arrange these items as they should stand in a regular 
statement. 

B) Taking this statement as a basis, account for the following 
transactions: 

a) The bank discounts $50,000 of commercial paper for 3 
months at 4 per cent per annum, making half the advance 
in cash and half in deposits. 

b) $70,000 of loans are paid up at maturity. $10,000 of this 
payment is made in cash; $15,000 in the notes of this 
bank; and the remainder in checks drawn upon this bank. 

c) A dividend of 2 per cent is declared, of which j is credited 
to depositors and f paid in cash. 

d) The real estate increases in value by $3,000. 

e) $5,000 is carried to surplus. 

Balance the completed account. What is now the proportion of 
reserve (including cash items and deposits in other banks) to demand 
liabilities ? What was the proportion originally ? 

17. Taking as basis the statement at the beginning of the previous 
question, account for the following transactions: 

a) The bank cashes checks on other banks to the amount of 
$2,500 but does not at once present them for payment. 

b) New deposit accounts are created to the exfent of $10,000 
by the deposit of checks on other banks. 



EXCHANGE 8i 

c) $5,000 of loans prove bad and are not paid at maturity, but 
the bank partially escapes loss by taking $4,000 worth of 
bonds and stocks which it held as collateral for the loans. 

d) The bank sells for cash at face value a draft for $1,000, 
drawn by it against another bank with which it carries a 
deposit account. 

Balance the completed account. What is the proportion of reserve 
to demand liabilities ? 

ii. Clearing-House Operations 

Questions 

1. When the butcher and the baker cancel from their books equal 
accounts against each other, is this in the nature of a clearing trans- 
action ? 

2. When you deposit checks in your bank and draw others in favor 
of your creditors, does the bank actually move money about? If 
all the parties interested dealt with the same bank, would that bank 
serve as a sort of clearing-house for these individuals ? 

3. What is the immediate function of a clearing-house? What 
are some of the indirect advantages ? 

4. Distinguish between clearing-house certificates and clearing- 
house loan certificates. 

5. Are clearing-houses more important for checks than for notes ? 
Why? Can you give instances of the practice of redeeming bank- 
notes through a clearing-house? 

6. Why is the expedient of combined reserves resorted to ? What 
is the fundamental advantage of the expedient ? Would it be advan- 
tageous to combine the reserves of New York banks regularly and 
permanently ? 

7. "Combined reserves strengthen banks in their dealings with 
each other, i.e., through the clearing-house. Equalized reserves aid 
banks in their drains over the counter." What does this mean ? 
Is it true ? 

8. Why in the United States do we trouble about combined 
reserves ? Is there really less money in the country in time of panic ? 

9. How does the issue of clearing-house loan certificates affect the 
power of banks to lend? Are they profitable to the banks? Do 
they stay out long ? 

10. Are weekly reports of clearings any true indication of the 
prosperity of business in general ? Explain. 

11. Are payments in settlement of stock transactions in Wall 
Street (and elsewhere) included in clearings? To what extent does 
the volume of such payments reflect business prosperity ? 



82 



OUTLINES OF ECONOMICS 



12. Do all checks pass through the clearing-house? 

13. How do banks not members of clearing-house associations 
manage their exchanges? 

iii. Comparison of Banking Systems 

Questions 

I. Draw up a comparative statement in the form indicated below 
to show the regulations and policies of the Bank of France, the Bank 
of England, the Reichsbank, and the national banks of the United 
States. 





Bank of 
France 


Bank of 
England 


Reichs- 
bank 


National 
Banks of 
the U.S. 


Datf 
t 


' of establishment and reasons for es- 














Own 
















Man 
Fina 
















ncial relations with government 










Cap 
Surp 


tal* 






























Extent of monopoly of issue 


















Nature of the limitation of the amount 










M 








J', 




















Flasticitv 




































Proportion to liabilities 
















> 


















X 


Policy of maintenance in crisis 











•In giving figures for capital, etc., give amounts in the currency of the respective coun- 
tries, with the equivalent sum in dollars m parentheses. 

2. What provisions of law, peculiar to the United States national 
banking system, interfere with the reasonable extension of bank credit 
(including deposits and notes) in time of financial stringency ? 



EXCHANGE 83 

^. What has been the effect of suspending the act of 1844 during 
periods of embarrassment for the Bank of England ? Would experi- 
ence suggest the repeal of the act, to give the bank greater freedom 

at all times ? n , , r t- :> 

4. Why is a large reserve maintained (a) by the Bank of I' ranee f 

(b) by the Bank of England? 

5. Explain in detail whether or not the following statement would 
represent a proper condition of the n-ih National Bank of Pittsburgh: 

Capital $150,000 Loans $500,000 

Surplus " 25,000 U.S. bonds SS.ooo 

Undivided profits 5,000 Other bonds and stocks 125,000 

Deposits 600,000 Real estate 90,000 

Iy|-Q(_es 160,000 Other assets 25,000 

Due from banks 80,000 

Deposited with U.S. treasurer 7,000 

Specie and legal tender 55>ooo 

6. Rank the national banks of the United States, the Bank of 
England, the Bank of France, and the Reichsbank in the order of 
(a) security of notes; (b) elasticity of note-issue; (c) reserve specifi- 
cally held against deposits; {d) normal proportion of total reserve 
to deposits; (e) proportion of deposits to notes; (/) closeness of 
governmental control or supervision. 

7. Why is an elastic currency desirable? Which of the means of 
payment in common use in this country are elastic ? 

8. State briefly the essential provisions of the Aldrich-Vreeland 
Act of 1908 and explain their purpose. 

9. Why do not bankers in England and Germany resort to com- 
bined reserves in time of panic as is done in this country ? 

10. Do the reasons which make a speedy redemption of bank 
notes desirable apply in the United States today? 

11. Give the arguments for and against state guarantee of bank 
deposits. 

12. Give the arguments for and against a central bank of issue 
in the United States today. 

iv. Foreign Exchange (treated under "International Trade") 

IV. International Trade 

1. The Principles Determining International Trade 

2. The Balance-of-Trade Idea 

3. Foreign Exchange and International Payments 

4. Regulation of International Trade (with particular reference 
to the protective tariff) 



84 OUTLINES OF ECONOMICS 

International trade does not differ essentially from domestic 
trade. The motives leading to trade between inhabitants of the 
United States and inhabitants of England are not different from the 
motives leading to trade between inhabitants of Illinois and inhabit- 
ants of California. It has become customary, however, to give 
separate treatment to international trade, largely because such 
trade is almost everywhere the subject of special regulation by 
government. 

I. The Principles Determining International Trade 

a) Trade Based upon Insuperable Differences of Economic Condi- 
tions (e.g., trade between tropical and temperate regions) 

b) Trade Based upon Differences Constituting Reciprocal Superiority 
(one region being superior in one line, the other region being 
superior in a different line, e.g., American export of breadstuffs 
to Cuba in exchange for sugar) 

c) Trade Based upon Differences Constituting Relative Superiority 
(e.g., American wheat in exchange for British steel) 

Given two regions where in each case the one is able, through 
natural endowment or character of population, to produce goods 
which the other cannot, it is natural that trade should arise. It is 
not diflScult to see, furthermore, that given two regions where one 
has a superiority (though not a monopolistic superiority) in one 
commodity while the other region has a superiority (though again 
not a monopolistic superiority) in another commodity, trade is again 
a natural result. The third case is somewhat more puzzling. Given 
two regions, one of which is superior to the other in both lines of 
production, trade may arise provided the superior region is relatively 
stronger (compared with the inferior region) in one line of production 
than it is in the other line. 

Note. — In every country natural advantages in production are 
reflected in the rates of wages and interest. In a country of superior 
advantages, the rates of wages and interest are likely to be high. 
Thus in the United States, the natural endowment of which is especially 
rich, wages are higher than in any other country; interest rates 
are also higher than in Western Europe. It follows that in industries 
requiring a relatively great expenditure of labor and an extensive 
capital equipment, as in many branches of manufacture, money 
costs of production are likely to be higher in the United States than in 
Europe, in spite of the fact that American workmen are often more 
efficient than European, and of the further fact that American capital 
frequently takes the form of better equipment than that of European 
countries. The money cost of production in the United States is 



EXCHANGE 85 

likely to be relatively low in the industries that make a large drain 
upon natural resources and require comparatively little use of labor 
and capital, as in many of the extractive industries. 

With the steady increase in population and capital, the United 
States gradually overcomes the disadvantages that lie in the way 
of successful manufacture. Owing to the operation of the law of 
diminishing returns it loses gradually its advantages in extractive 
industries. Accordingly, even without interference on the part of 
the government, the United States would become more and more a 
manufacturing nation and become less and less engaged in extractive 
industries. 

Questions 

1. A is a good musician but is temperamentally unfitted for other 
work. B, while fond of music, is eflficient only in farming. 'Is an 
exchange likely to take place? Would the situation be different if 
A and B represented regions of different natural endowment ? 

2. A by one day's labor can make nine units of x or two units of y. 
B by one day's labor can make two units of x or nine units of y. 
Would specialization and exchange be likely to take place ? Would 
the situation be different if A and B represented regions instead of 
men ? 

3. A by one day's labor can make 20 units of x or 10 units of y. 
B by one day's labor can make 15 units of x or 5 units of y. Would 
specialization and exchange be likely to take place? Would the 
situation be different if A and B represented regions instead of men ? 

4. A is a very able lawyer and also a very skilful stenographer. 
Is it surprising that he confines himself to the law and hires a stenog- 
rapher who is much less skilful ? 

5. In the eight months ending August i, 1909, the export and 
import trade of the United States with Europe amounted to $1,323,- 
000,000; the export and import trade with South America amounted 
to $166,000,000. Do you believe that the relative volume of the 
two branches of our foreign trade will be the same fifty years from 
now ? Why ? 

6. Every important commercial nation has, in the last two decades, 
endeavored to establish control over some portion of the tropics. 
Explain this fact on the basis of the conditions underlying inter- 
national trade. 

7. When China becomes modernized can the United States expect 
to export to that country large quantities of (a) manufactures ? (b) 
agricultural products ? 

8. If Canada and the Um'ted States were one country would trade 
relations be different from those of today ? 



86 OUTLINES OF ECONOMICS 

9. An American statesman of the nineteenth century declared 
that it was bad poHcy for the United States to import any commodity 
that could be produced in the United States ? Do 'you agree ? 

10. Another statesman urged that no commodity which can be 
produced in the United States with the same amount of labor as in 
foreign countries could be economically imported. Do you think 
this position tenable ? 

11. It has been asserted that the income of the citizens of the 
United States could be greatly augmented if all commodities now 
imported were produced at home, and all commodities now exported 
were consumed at home. The cost of transportation, now amount- 
ing to several hundred millions annually, would thus be saved. Apply 
this argument to trade between the Middle West and the Pacific 
slope, and expose the fallacies involved in it. 

12. "When we buy goods abroad, we get the goods and the 
foreigner gets the money. When we buy goods at home we get the 
goods as before, but the money remains in this country." Is this a 
valid argument against importing foreign products? 

13. From your knowledge of the development of wants under 
modern conditions, should you argue that international trade will 
tend to increase or to diminish in the future ? 

14. What accounts for the fact that England exports cutlery and 
fine hardware to all parts of the world ? Is it due simply to superior 
resources of coal and iron? 

15. Is international trade likely to be permanent if based upon 
(a) differences of climate and other natural conditions ? (b) differences 
in relative supply of land ? (c) differences in relative supply of capital ? 
(d) differences in character of population ? Tell why you answer as 
you do in each case. 

2. The Balance-of-Trade Idea 

The doctrine of the balance of trade, although it is of relatively 
little significance in the economic science of the present day, has 
historically been important. It merits discussion at this point 
chiefly because of its lingering influence upon uncritical public opinion 
and because of its relation to the subject of the international exchanges. 

Questions 

1. What is meant by an unfavorable balance of trade? 

2. Is an "unfavorable balance of trade" really disadvantageous to 
a country ? 

3. Does the term balance of trade refer to a balance between one 
nation and another nation or between one nation and the rest of the 
world ? 



EXCHANGE 87 

4. The United States imports heavily from South America but 
exports very little to that continent. Is there any way in which the 
resulting indebtedness can be settled without a transfer of money? 
If so, explain how. 

5. It is argued that imports of foreign goods may result in the 
necessity of exporting money to pay for them, and that, therefore, 
where such is the case, such imports should be stopped. Do you 
agree ? 

6. In the seventeenth century many nations tried to regulate 
trade so as to bring money into the country and keep it from going 
out. Was their plan a wise one ? 

7. Could a country continue to export gold for a long period of 
time ? If not, why not ? If so, under what conditions ? 

8. The value of British imports is nearly $1,000,000,000 in excess 
of the value of British exports and an excess of imports has continued 
for many years. How can you explain this? 

9. The United States, in recent years, has had a favorable balance 
of trade and yet has exported gold. Explain. 

3. Foreign Exchange and International Payments 

Questions 

1. Make a list of the causes which may lead to a flow of money 
from one country to another. 

2. Explain the steps in the mechanism of foreign exchange by 
which a Chicago importer can pay a debt which he owes in London. 

3. What is the par of exchange ? How is it determined ? 

4. What are the gold points ? Why does not exchange normally 
rise above the upper gold point or fall below the lower gold point ? 

5. "The nations of the world should adopt a uniform system of 
currency with a common standard. This would do away with all 
this bother about 'par of exchange,' 'gold points,' 'rate of exchange,' 
etc." Why or why not? 

6. What persons deal in foreign exchange ? 

7. "The rate of exchange is simply another case of the applica- 
tion of the principle of demand and supply. Given two trading 
regions, if the payments due each from the other are equal, exchange 
will be at par. If an unequal balance exists, demand will exceed 
supply, or vice versa, and the rate of exchange wall move away from 
parity." Take two regions, assume certain trading operations, and 
demonstrate this assertion. 

8. Is the New York rate of exchange on London likely to fall 
below par at one period of the year and to rise above par at other 
times ? If so, when and why ? 



88 OUTLINES OF ECONOMICS 

9. If a Chicago merchant imports coffee from Brazil, and nobody 
in Brazil imports goods from the United States, how could the debt 
be paid with foreign exchange? 

10. "International payments are made by credit instruments as 
long as they last. Gold flows only as a last resort." Explain. 

11. If there should be a failure of the cotton crop next year, would 
there be any effect upon international exchange ? 

12. Would a rise in the rate of interest in New York tend to affect 
the international flow of gold ? Would it tend to affect the rate of 
exchange on London ? 

13. How would the opening of rich gold mines in the United States 
tend to affect the rates of foreign exchange ? 

14. Would a rise in prices due to an inflated paper currency, such 
as took place during the Civil War, increase imports ? 

15. How is a country like England, which has no gold mines, 
supplied with gold? 

16. Can gold have a lower value in England than in the United 
States ? 

17. Would the discovery of a rich field of gold in the United 
States increase or diminish the real wealth of England ? 

18. How does it concern the people of the United States whether 
or not a foreign country adopts the gold standard ? 

19. Should you expect gold to have a lower value in Alaska 
than in England ? How great could such a difference in value be ? 

20. In the long run international payments tend to take the form 
of commodities, rather than of exchange or of specie. Explain the 
way in which (a) rates of foreign exchange stimulate exports at times 
when imports are in excess; (b) flow of money automatically gives 
place to movement of goods. 



4. Regulation of International Trade (with particular reference 
to the protective tariff) 

Questions 

1. What is the distinction between a protective tariff and a 
tariff for revenue only ? 

2. It was once thought by some that if one person gained in trade 
the other lost. Do you believe this ? Would such a theory hold true 
as regards trade between nations? 

3. Assuming it to be constitutional, would it be wise for the state 
of lUinois to levy tariff duties on goods brought in from other states ? 

4. If the duty on oranges were sufl&ciently high it might be possible 



EXCHANGE 89 

to develop the orange-growing industry in Illinois. Would it not 
be wise to do so ? 

5. It is argued that the protective tariff by making it profitable 
to carry on an industry increases the output and engenders a compe- 
tition which ultimately lowers prices. Do you think so ? How does 
this argument agree with the argument that a permanent tariff is 
needed ? 

6. What is the infant-industry argument? Is it economically 
sound in your opinion ? Does it apply to the conditions in the United 
States today ? 

7. At one time it was argued that because wages were high in 
this country a tariff was necessary to protect the manufacturers 
against European products made by cheaper labor. At a later period 
it was argued that wages were high because of the tariff, therefore 
the tariff should be continued in order to keep up the high level of 
wages. Can these statements be reconciled ? Are they correct ? 

8. Can one without inconsistency use the infant-industry argument 
and at the same time argue for a permanent tariff to protect labor ? 

9. Protectionists assert that a developed and sheltered "home 
market" is of great benefit to sellers and buyers ahke. Is such a 
home market worth the cost of protection (a) to the manufacturer ? 
(b) to the consumer ? 

ID. "If universal free trade were practicable it would doubtless 
be economically desirable. In actual fact, however, most commercial 
nations maintain protective tariffs; and consequently no single 
nation can afford to adopt a free trade policy, which would put it in 
the position of exempting foreign manufactures from duties while 
its own manufactures were taxed in foreign ports, and would deprive 
it of the power to secure tariff concessions from other countries by 
threats of retahatory tariff rates." What do you think of this 
argument ? 

11. One contention in favor of a protective tariff for a nation with 
highly developed industries is the claim that such a tariff is necessary 
to prevent the "dumping" of goods by foreign makers, and conse- 
quent depression of the home market. Is this a valid argument? 
Does it make any difference whether the "dumping" is persistent or 
sporadic? Would "dumping" be a serious evil if there were general 
free trade ? 

12. Nation A levies no protective duties, and has, as a result, 
highly specialized industry, the products of which it exports in ex- 
change for foodstuffs. Nation B, by heavy protective duties, has 
artificially forced the diversification of its industries. Which nation 
is better prepared for war ? Which is better prepared for peace ? 

13. Do you think that considerations of military necessity, social 



90 OUTLINES OF ECONOMICS 

solidarity, and the cultural advantages of advanced and diversified 
industry have a more or a less important bearing upon tariff problems 
than the economic question of the cheapness of goods ? Are they 
independent of the cheapness of goods ? 

14. "The protective tariff not only protects American industry: 
it also forces the European producer to pay for most of the expenses 
of running our government." Do you agree ? 

15. Who actually pays protective duties? Do you suppose the 
revenue to the government is as great as the increased expense caused 
to consumers of imported goods ? 

16. Suppose that a protective duty of $1 per pound on a com- 
modity never before produced within the country has so stimulated 
domestic industry that only one miUion of the four miUion pounds 
of this commodity consumed in the country are now imported. How 
great will be the expense to consumers due to the imposition of the 
duty ? How great will be the customs revenue to the government ? 
What becomes of the difference ? Does the government get any of it ? 

17. "Everything we buy abroad diminishes by so much the 
demand for American labor." Comment. 

18. When did the United States adopt a policy of high protective 
duties and what were the reasons put forward at the time ? 

19. Why has the South favored free trade ? 

20. What are the reasons for the growing demand for a reduction 
of the tariff ? 

21. Explain the attitude of the different sections of the country 
toward the tariff at the present time. 

22. What arguments can be advanced in favor of continuing the 
policy of protection in the United States ? 

23. We have had protection and the country has prospered greatly; 
therefore protection should be continued. Do you agree ? 

24. What is reciprocity ? Has it any advantages over (a) unquali- 
fied protection ? (b) absolute free trade ? 

25. Would it be more economical to aid American industries by 
giving them a bounty equal to the protective duty instead of that 
duty? 

26. Why do we not have export duties in the United States? 
If export duties were imposed, whom would they benefit ? 

27. How would the adoption of free trade affect the American 
laborer? Which would better protect American labor, high tariff 
duties or laws restricting immigration ? 

28. What is the effect of a protective tariff on the conservation 
of natural resources? 

29. Who really determines, in this country, whether an industry 
shall be protected? Who determines what amount of protection 
shall be given ? Is the method a scientific one ? 



F. THE DISTRIBUTIVE PROCESS 

I. Introductory 

II. Rent 

III. Wages and Trade Unionism 

IV. Interest 
V. Profits 



I. Introductory 

We have to do here with the sharing among the members of society 
of the economic goods produced— of the social dividend. How do 
men secure shares of this social dividend? What determmes the 
amount of their shares? Of course, these shares are derived ulti- 
mately from production, and as industry is now organized the social 
dividend is distributed in the first instance mainly among the pos- 
sessors of the productive agents. The laborer receives wages; the 
landlord, rent; the capitalist, interest; and the entrepreneur, profits. 
Ordinarily the payment is made in the medium of exchange, money. 
But money-wages, money-rents, etc., are merely the nominal shares 
in the distribution of wealth, and are technically called nominal 
wages, nominal rents, etc., accordingly. Real wages, rents, interest, 
and profits are shares or specific incomes of goods, and these shares 
plus taxes, etc., make up the amount of the social income or social 
dividend— the total of goods available for current use. 

The determination of these distributive shares is not of course 
effected in practice by formal division of the social dividend as a lump 
sum. The term social income does not refer to goods actually col- 
lected together as an aggregate, or administered collectively for soci- 
ety. Practically, wages, interest, and rent are fixed by the bargains of 
entrepreneurs, and represent what they pay for labor and for the 
use of capital and land. In other words, the problems in distribution 
are problems in value. At this point the principles of value should be 
reviewed and the forces and manifestations of both demand and supply 
should be recalled to mind. ^ 

It is not contended that in actual practice all mdividual mcomes 
are in exact proportion to productive service rendered. In the indi- 
vidual case, shares in the social dividend are secured in many ways and 
a multitude of forces bear upon the matter. For example, shares of 



91 



92 OUTLINES OF ECONOMICS 

the social dividend are often the result of gift, inheritance, customary 
or legal appropriation, force, fraud, or theft. Most incomes of adult 
persons, however, are received because of direct or indirect partici- 
pation in the productive process. 

Questions 

1. Was there any distributive problem when each household was 
economically self-sufficient ? 

2. A man devotes his time and effort, and the use of tools and land 
which he owns, to the making of one commodity, which he sells. 
Is the determination of his income, as a practical matter, a question 
of exchange or a question of distribution ? 

3. Four men, A, B, C, D, co-operate in producing a commodity. 
A provides the land, B furnishes the capital, C does the manual work, 
and D watches the market and directs the production. Explain 
whether it is a question of exchange or a question of distribution to 
determine (a) the aggregate earnings of the four men; (b) the earn- 
ings of each man individually. 

4. If a man co-operates with others in making one commodity, 
can he expect to get more than a share of the product ? Try to answer 
the question : What determines the extent of the share he can secure ? 

5. "The distribution of wealth has become a practical problem 
because of specialization in industry." Comment. 

6. "The theory of distribution is the theory of value applied to 
the valuation of productive services." Do you agree ? 

7. "Since real wages, rent, interest, and profits are shares of 
goods, they must be paid from the products of industry already past; 
for the goods which any given land, labor, and capital are in process 
of producing are not yet available." Why or why not ? 

8. In view of the gradual expansion of industry, will past products 
available for the payment of real wages, interest, etc., ordinarily 
be equal in amount to the output which those who receive the pay- 
ment are currently engaged in producing? Does this suggest an 
element of unfairness in distribution ? Does it suggest a motive for 
continued production ? 

9. Can you say which is more important, the productive process 
or the distributive process ? Are they entirely separate and distinct ? 

10. "The only question of any real significance in economics is 
the question of distribution. Give us proper distribution." Do 
you think the amount to be divided has any significance ? 



THE DISTRIBUTIVE PROCESS 93 



II. Rent 



1. Introductory 

2. The Differential Return (without necessary reference to any 
particular system of land ownership) 

3. The Relation of Economic Rent to Contract Rent under a Regime 

of Private Property 

4. Rent and Cost of Production 

5. Rent in Relation to Taxation 

6. Rent and Social Reform 

7. Economic Phenomena Analogous to Rent 



1. Introductory 

The term Rent is here employed in a special and technical sense 
with reference primarily to the productivity of land. Rent is the 
return for the use of land under conditions which give it superior 
productiveness. 

As has been explained, the amount of this return is a question 
involving the application of the theory of value, and it depends, as 
always in a value problem, upon demand and supply. 

Questions 

1. Is the demand for land a case of derived demand? elastic 
demand ? composite demand ? joint demand ? Show why you answer 
as you do in each case. 

2. Does the elasticity of the demand for land depend on the use 
to which the land is to be put ? Illustrate your answer by means of 
examples. 

3. In what ways is the supply of land influenced by each of the 
following forces: (a) physical limitation; (b) social limitation, either 
formal or informal ; (c) cost of production ? 

4. Is there greater scarcity of good sites for ofiice-buildings than 
of good corn-land ? Why ? 

5. Could you "make" land of a character suitable for (a) building 
sites? (b) quarries? 

2. The Differential Return (without necessary reference to any 
particular system of ownership) 

Let us assume a given demand for the services of land. It is 
then to be noticed that on the supply side conditions arise in actual 
experience which give rise to a "differential return," according to the 
qualities of the land, and the way it is used. It is important to notice 



94 



OUTLINES OF ECONOMICS 



that this "differential return" would exist under any organization of 
society. 

Quality of land is by no means a matter of fertility alone. In 
the case of agricultural land, for example, the superiority of one piece 
over another consists in its capacity to yield a given product at lower 
cost; and since the cost of transportation to market forms part of the 
cost of production, properly speaking, accessibility of location is no 
less important than fertility of soil in determining the rent of agri- 
cultural land. Hereafter such land will be regarded as good in pro- 
portion as it combines fertility with favorable situation. It need 
scarcely be pointed out that in the case of building sites location is 
usually the only element of practical significance. 



Questions 

I (to illustrate agricultural rent, assuming extensive cultivation 
alone). Suppose that in a certain self-sufl&cing community there are 
three plots of land. A, B, and C, of different grades such that the 
equivalent of loo days' labor of a man with appropriate tools pro- 
duces on A 200 bushels of wheat; on B, 150; and on C, 100. That 
is, a bushel of wheat costs on A half a day of labor and capital service ; 
on B, two-thirds of a day; on C, i day. Obviously A will be culti- 
vated first. B will not be cultivated until the demand for wheat 
warrants a labor and capital cost of two-thirds of a day per bushel, 
and C will be cultivated only when the demand warrants a cost of 
I day per bushel. Assuming that the product of each piece of land 
is limited to the amount specified above, make out a table such as 
is indicated below, showing, for each plot of land and under each of 
the given conditions, the yield in bushels and the rental in bushels 
which would be paid. 



When Demand for Wheat Warrants 


Land A 


Land B 


Land C 


Production at a Cost of 


Yield 


Rental 


Yield 


Rental 


Yield 


Rental 
















§ day per bushel 









2. Explain, step by step, the causes of rent under conchtions of 
extensive cultivation by showing why, given the assumptions of the 
previous problem, (a) the price of wheat rises; (b) poorer land is 
resorted to; (c) the better land commands a rental; (d) the worst 
land in use does not command a rental. 



THE DISTRIBUTIVE PROCESS 95 

3 {to illustrate agricultural rent, assuming intensive cultivation alone). 
Suppose that land A, as described in the preceding problems, is the 
only land available. If the application of more than too days' labor 
on this land causes diminishing returns to appear, not more than 
200 bushels can be raised at the initial cost per bushel of a half-day's 
use of labor and capital. Using the same figures as m Question i, 
assume demand to increase so that a total of first 100, then 200, 
"and then 300 days' labor is applied mth a resultant product of first 
200, then 350, and tiien 450 bushels. Work out the rent in each 
case. Bear in mind that value in such cases must cover the cost of 
the marginal, or most costly, unit of the product. The total value 
of the crop will therefore exceed the total cost of the crop. 

4. In actual practice, if difierent grades of land are simultaneously 
under cultivation, will cultivation be intensive (o) on any of the land ? 
{b) on all the land? 

5. Formulate a statement explaining the amount of rent which a 
given piece of land will command as a result of both intensive culti- 
vation and differences in quality of land. 

6. "Assuming demand, the cause of rent is the inadequacy of the 
better grades of land. This inadequacy depends upon {a) the physical 
scarcity of the better grades of land, and (&) the law of diminishing 
returns." Do you agree ? 

7. If all land were equally good, could there be rent? 

8. Could the worst land under cultivation yield rent ? 

9. Does rent inevitably exist if at any one time lands of different 
fertility are cultivated ? 

10. Could land command rent while other land equally good 
remained unused ? 

11. Can there be no-rent land? Can there be no no-rent land? 
Under what conditions ? 

12. What would be the effect upon rents if new land were dis- 
covered ? if a railroad opened up a new country ? 

13. If the state owned all the land would there be any rent? 
Why? , . 

14. "The doctrine of rent breaks down because the doctrine of 
marginal cost is absurd. Suppose that the marginal cost of wheat 
to a certain farmer is 70 cents per bushel and that wheat is selling 
for 70 cents. If the average cost to this farmer is 50 cents, he will 
be under strong incentive to increase his output. Thus marginal 
cost does not operate so powerfully as average cost in price determi- 
nation and thus the rent theory breaks down." Why or why not? 

15. Is the rental of building-sites determined by the same prin- 
ciples which apply to agricultural land ? If so, what use of building- 
sites corresponds to intensive cultivation ? 



96 OUTLINES OF ECONOMICS 

1 6. Two isolated islands, A and B, are connected by a bridge. 
No foreign traffic exists. A can be used for cultivation alone, B for 
habitation alone, (a) Can any land on A have rent ? Can any land 
on B ? (b) Can all land on A have rent ? Can all land on B ? 

3. The Relation of Economic Rent to Contract Rent under 
A Regime of Private Property 

For want of a better term let us call the "scientifically determined 
differential" discussed in the preceding section economic rent. Now, 
in this present society of ours, the actual payment for the use of land 
(sometimes called commercial or contract rent) may be widely different 
from the economic rent, owing to imperfect competition, custom, 
long-term contracts, etc. 

Questions 

1. Assuming perfect competition, demonstrate that (a) the land- 
lord cannot exact more than the economic rent from a tenant; {b) the 
tenant cannot secure the use of land without paying as much as the 
economic rent. 

2. Can you cite cases where commercial rent exceeds economic 
rent ? cases where it is less than economic rent ? Try to explain the 
discrepancy in each case. 

3. Does contract rent tend to equal economic rent under the 
share system ? 

4. What determines the amount which would be paid for a year's 
use of (c) timber lands? {b) ore-bearing lands? (c) city lots? {d) 
factory sites ? {e) land controlling sources of water power ? (/) fishing 
waters ? 

5. Is the "rent" of a down-town New York office rent in the 
economic sense of the term ? 

6. How much could be exacted for the use of land if it afforded 
an absolute monopoly of the sources of some rare mineral ? 

7. What is the reason for the assessment of betterments when a 
street is improved ? 

8. Are we to term the income yielded by permanent improvements 
on land rent, interest, or profits? 

g. Are tenants likely to make permanent improvements upon 
rented land ? Why ? 

10. How would rents in this country be affected by inventions 
radically improving, as regards efficiency and cheapness, {a) harvest- 
ing machinery ? {b) artificial fertilizers ? (c) refrigerator freight cars ? 
{d) automobiles ? 

11. It is said that the development of the bicycle affected sub- 
urban site-rents. Explain. 



THE DISTRIBUTIVE PROCESS 97 

12. Will agricultural rents increase in the United States? Will 
urban rents increase ? Why ? Would your answer be the same for 
all sections of the country ? 

13. Why did the land-owning classes in England oppose the repeal 
of the Corn Laws, which levied a duty on imported grain ? 

14. A 50-acre farm has a normal yield of 20 bushels of wheat per 
acre, and the normal price of wheat is one dollar per bushel. The 
farmer's outlay for labor, use of tools, etc., is $300 annually. His 
own labor is worth $500. (a) What is the probable marginal cost 
of wheat on this farm ? (b) What is the economic rent ? (c) If, because 
of a temporary corner, wheat were to sell for Si . 50 for a few days, 
would that affect (a) the marginal cost ? (b) the economic rent ? (c) 
the contract rent ? 

15. "The price of land is ordinarily fixed by capitalizing the rental 
— ^i.e., a person will pay for a piece of land an amount which, if it 
were used for another investment equally secure and promising, 
would yield an income equal to the rent of the land." Is this an 
adequate statement? Is present rental or expected, future rental, 
capitalized ? 

16. "We all know perfectly well that much land which is not yet 
used will sell for a good figure. Take, for example, building land 
at the outskirts of the building section. The capitalization of rental 
in this case would be zero, yet the land will bring a good price." 
Comment. 

17. A certain lot of city land is leased for 99 years at $10,000 a 
year. If taxes on the land amount to $2,500 per year, what price 
would the land sell for, assuming that the prevalent rate of net return 
from similar investments is (a) 4 per cent? (b) 5 per cent? (c) 6 
per cent ? 

4. Rent and Cost of Production 

Questions 

1. From the standpoint of a tenant, is the rent he pays one of 
his expenses of production ? 

2. Suppose that the tenant should have his rents remitted by a 
benevolent landlord. Would the tenant increase his output ? Would 
he sell this output at a lower price per bushel ? Does the payment 
of rent affect the price of the products of rented land ? 

3. Taking the term cost of production to mean marginal cost, or 
the cost which determines the supply-price of the commodity pro- 
duced, is rent determined by cost of production or is cost of pro- 
duction determined by rent in the simple case of one agricultural 
commodity, as wheat, raised on different grades of land ? , 



98 OUTLINES OF ECONOMICS 

4. If the owners of wheat lands mentioned in the last problem 
refused to be paid for the use of their lands, would the cost of produc- 
tion of wheat be changed ? 

5. In fact, land is used for many purposes. Does the fact that 
buildings are erected on better lands than are now used for growing 
wheat cause the marginal cost of wheat to be greater than it would 
be otherwise ? 

6. Is rent a result of production, a condition preceding production, 
or an outlay in course of production, (a) in the case of newly reclaimed 
land wanted for only one use ? (b) in the case of land which has 
proved its fitness for many purposes ? 

7. A grocer establishes his shop on a corner site in a fashionable 
residence quarter of a large city. Should you expect his rental to 
be high ? Why ? Should you expect him to charge high prices ? 
Why ? Why should he choose such a location ? 

8. The small shopkeeper on the outskirts of a large city frequently 
says that he can sell his goods cheaper than the big stores in the 
center of the city because his rent is low. If that is so why do not 
the large stores move to a place where their rents would be lower? 

5. Rent in Relation to Taxation 

Questions 

1. Suppose a tax, equal to the economic rent, levied on every 
piece of land. Assuming perfect competition, and assuming that the 
tenant leaves the land in as good condition as he found it, could 
a landlord shift to his tenant the burden of the tax, wholly or in 
part ? What would be the effect of the tax upon agricultural prices ? 

2. How should you modify your answers to the preceding question 
if the tax were less than the economic rent, but proportional to it ? 

3. In actual practice who would be likely to bear the burden of 
the tax in each of the above cases ? 

4. How would the price of land be affected in each of the above 
cases? Would a man who bought the land after the tax had been 
imposed bear any of the burden of this taxation ? 

5. How would a tax of 10 cents per bushel on wheat affect rents ? 

6. Rent and Social Reform 

Land is characteristically a free gift of nature, and many of the 
advantages of owning land arc the results of natural or social condi- 
tions which the owner has done nothing to bring about. Hence the 
income of the landlord has been called the unearned increment, and 
social reformers have (iesired to aboUsh it. 



THE DISTRIBUTIVE PROCESS 99 

Questions 

1. Give a strildng case of the unearned increraenf from your own 
experience. 

2. A corporation buys a tract of waste land and proceeds to con- 
struct a large industrial plant, and to develop transportation facilities, 
lay out streets, and otherwise provide for the building up of a mill 
town. Do rents in such a town constitute an unearned increment ? 

3. Did individuals or society at large create the conditions which 
cause rent to emerge ? 

4. Do you consider that the real justification of private property 
in land is the fact that the acquisition of the land has involved effort 
and sacrifice, or the fact that land held as private property is more 
likely to be utilized eflSciently for production ? 

5. Would the amount of available land be changed if private 
• property in land were abandoned ? 

6. What advantages to society result from the private ownership 
of land ? 

7. If land nationalization is to be resorted to should you favor 
accomplishing it by the method of compensation or by that of con- 
fiscation ? Why ? 

8. Is it right to buy stolen property? Since land is Nature's 
gift, has one a better right than another to it? Could we justify 
confiscation by this line of reasoning ? 

9. Can it be said that at present the rent surplus is practically 
to be regarded as interest on the money spent in the purchase of the 
land? Does that justify us in continuing the payment of rent to 
individual landowners? 

10. Should you regard it as confiscation to tax away all future 
unearned increment ? Could it be done ? 

11. Is land-owning always profitable? Do land- values always 
rise? 

12. Would a tax on rent, by jeopardizing the advantages of land- 
owning, prevent the improvement of land ? Do you know of cases 
in which persons have erected buildings or made other improve- 
ments on land they did not own ? 

7. Economic Phenomena Analogous to Rent 

The principles of rent have often been extended to explain by 
analogy economic phenomena other than the differential return to 
land. Thus the excess of the total utility of a commodity over its 
total cost is called consumers' rent; the excess of interest received 
for loans of capital above the cost of saving which lenders have 
incurred is called savers' rent, etc. 



lOO OUTLINES OF ECONOMICS 

Again, the higher earnings of specially skilled workmen or highly 
efficient entrepreneurs are often Hkened to rent. 

A particularly interesting analogy is presented by the case of 
capital goods which cannot readily be duplicated or increased in 
amount, and which thus afford at least temporarily a superior and 
limited productive service. The return for such services has been 
called quasi-rent and constitutes the borderland between rent and 
interest. 



III. Wages and Trade Unionism 

1. The Demand for Labor 

2. The Supply of Labor 

3. Some Practical Applications of the Principle of Demand and 
Supply to the Subject of Wages 

4. The Specific Productivity Theory of Wages 

5. Trade Unionism 

The problem here is the evaluation of the services of labor. 

Wages in a specific case are the payment given for labor service 
rendered. Fundamentally, wages are economic goods — commodities 
and services (real wages). Practically, labor is paid for in money 
(money-wages or nominal wages) which gives the laborer command 
over these goods. 

Our discussion will center on the application of principles of 
demand and supply to the problem of the value of labor. 

I. The Demand for Labor 

Questions 

1. Is the demand for labor a derived demand? a composite 
demand ? a joint demand ? an elastic demand ? a case where the prin- 
ciple of substitution has wide play ? Prove your answer in each case. 

2. Is the demand for the labor of footmen direct or derived? Is 
it a joint demand ? 

3. In determining the wage of a particular man, are we concerned 
with the demand for labor in general, or with the demand for labor 
of the kinds he can furnish, or with the demand for labor in his trade ? 

4. " Since labor is in demand simply as a means to the attainment 
of the utilities it serves to produce, the maximum price which will 
be paid for labor can never normally exceed the normal price of the 



THE DISTRIBUTIVE PROCESS loi 

product. Whenever tools, etc., are necessary in production the 
maximum price which could be paid for labor will be less than the 
price of the product by the amount which must be spent for the 
use of the other productive factors." Do you agree with this Kne 
of reasoning ? 

5. Are these acts necessarily offers of employment to labor: 
(a) an offer to purchase a watch; (b) an offer to let a contract to 
build a $100,000 house; (c) investment of $1,000 in a savings bank ? 

6. Does a demand for antiques, paintings by old masters, etc., 
affect the general demand for labor ? 

7. Is the demand for commodities already manufactured a demand 
for labor ? 

8. If it takes 20 days to make an automobile, does an order for 
the delivery of an automobile within a week create a demand for 
labor ? 

9. Does the manufacture of shoes create a demand for the employ- 
ment of labor in other industries ? 

10. Will the demand for labor be greater in a sparsely settled 
country or in a densely settled country, assuming rich natural resources 
in each case ? 

11. Speaking generally, does the laborer gain or lose by working 
under conditions of abundance of land and capital ? 

12. If a factory town is destroyed by fire will the demand for 
labor throughout the country at large increase or decrease? 

13. Why should not the farmer who uses good land pay higher 
wages than the farmer on poorer land, instead of pa3dng rent ? 

2. The Supply of Labor 

The value of commodities in general has been shown to be related 
to conditions of supply — physical limitation, cost of production, 
formal and informal social control, monopoly, perishability, etc. 
Now, in attempting to discover how labor-service is evaluated, we 
must inquire whether this particular commodity is subject to the 
same laws of supply as the others. The inquiry is complicated by 
the fact that supply of labor is largely a matter of the number and 
abilities of the persons who work. But it is not permissible to regard 
persons as laborers only, with no interest in life except the rate of 
wages. These same persons are consumers, to meet whose needs 
the industrial system exists. Their capacities, their willingness to 
work, their very existence, depend not simply on the desire of others 
for their services but also on the desire to live and the ideals of living 
which have animated their ancestors and which continue to animate 
the workers themselves. 



I02 OUTLINES OF ECONOMICS 



Questions 



1. Does every individual represent the same amount of labor- 
power ? Why ? 

2. Is there at a given moment any physical limitation of the 
supply of (a) laborers? (b) labor? What is the nature of the 
limitation ? 

3. What relation exists between the standard of living and the 
supply of (a) laborers ? (b) labor ? 

4. Ordinarily an increased demand for a commodity which is not 
absolutely limited in amount will result in an increased supply. To 
what extent would this be true of laborers ? of labor ? 

5. Does cost of production in the case of labor mean (a) mere 
subsistence of the particular laborer? (b) mere subsistence plus a 
return for expense of training ? (c) sufficient return to enable a laborer 
to rear a family ? If the last, how large a family ? 

6. Does what it "cost to produce" a given laborer determine 
his wage? Does it have any bearing on the rate of wages in the 
future ? 

7. Does the amount of labor which will be supplied depend to any 
extent upon the rate of wages ? If so, does the rate of wages influence 
the number of persons able to work, or their wiUingness to work, 
or both ? 

8. To what degrees and in what ways is the supply of labor 
service affected by (a) perishability ? (b) difficulty of transportation ? 

9. "The owner of labor cannot be separated from the commodity 
he sells. He must deliver it in person. This makes a difference 
between the supply of labor and the supply of other goods." How ? 

10. Cite cases where formal social control affects the supply of 
labor. Cite cases where informal social control affects it. 

11. Does legal limitation of the hours of labor affect the supply 
of labor? May it in some cases actually increase labor supply? 

12. Cite cases of monopolistic limitation of the supply of labor. 

13. Do you think that immigration increases the supply of labor? 

3. Some Practical Applications of the Principle of Demand 
AND Supply to the Subject of Wages 

Questions 

I. It has been said that an increase in the number of laborers 
cannot depress general wages because this increase impUes a corre- 
sponding increase in consumption and in demand for labor. Is 
anything overlooked in this argument ? 



THE DISTRIBUTIVE PROCESS 103 

2. How would a sudden introduction of machinery aflfect wages? 

3. Why are the wages of skilled managers greater than those of 
street cleaners ? 

4. Why are the wages of servants higher in the United States 
than in England for the same grade of service ? 

5. What should you have to pay a cook in an Alaskan gold- 
mining camp ? 

6. Laborers on railway embankments in India were paid, accord- 
ing to Mr. Brassey, from 9 to 12 cents a day, but in England from 
75 to 87 cents a day; yet the expense of building a mile of rail- 
way was about the same in the two places. How do you account 
for this? 

7. Does unskilled labor sufifer more or less than skilled labor by 
forced changes to new employment ? 

8. Can laborers, by strikes and combinations, raise their wages 
to a point where nothing is left for rent or interest ? Why not ? 

9. Differences of wages have been classified as follows: 
(i) Differences of Wages for Different Employments: 

(i) Differences tending to equalize the advantages of all occupa- 
tions by making reward proportionate to effort and sacrifice, 
(ii) Differences arising from the more or less limited number of 
persons whose aptitudes, inborn or acquired, permit them 
adequately to perform a given task. 
(2) Differences of Wages for Different Persons in a Given Employ- 
ment: 

Differences corresponding to differences of eflSciency. 
Explain wherein these various differences are due to conditions of 
demand and wherein they are due to conditions of supply. 

10. Give examples of cases in which arduous and unpleasant work 
commands a high compensating wage. Give examples of other cases 
where low wages and hard conditions of work go together. Can you 
explain the difference between the two groups of cases which results 
in this difference of remuneration ? 

11. Is the labor market a single, competitive market ? Does the 
illiterate immigrant compete for work with the lawyer? 

12. Show by means of examples how differences of wealth, educa- 
tion, social connection, inborn ability, etc., may separate the labor 
market into non-competing groups. 

13. In the United States are the economic barriers between social 
classes effectual barriers ? 

14. "To secure the practical results of free competition as between 
employments it is not necessary that every person in any one employ- 
ment shall be free to change to another. If a few are mobile their 
shifting will ordinarily suflSce to adjust the supply of labor to the 



I04 OUTLINES OF ECONOMICS 

demand in each employment." Explain this statement. What 
bearing has it on the principle of non-competing groups ? 

15. "Competition between apparently non-competing groups 
is in some cases made operative by an application of the principle 
of substitution. It may be possible, e.g., to replace skilled laborers 
by unskilled laborers working with improved machinery. The gap 
which exists between the two grades of labor is here bridged by 
substituting capital for superior skill of workmen." Give examples 
of indirect competition of this sort. 

16. What effect on wages should you expect as a result of better 
provisions for free technical education ? 

17. Are the farmer, the miller, and the baker members of the 
same group of laborers, or of competing groups, or of non-competing 
groups ? 

18. Does the principle of non-competing groups help to account 
for differences between men's wages and women's wages? 

19. In a certain office a man and a woman are sitting side by side 
doing the same work. The woman is, if anything, more efficient 
than the man. Her wage is considerably lower. Explain how this 
can be. 

20. What reasons can you offer to explain why the wages of 
women are generally lower than the wages of men ? 

21. If laws were passed requiring that women should have the 
same wages as men wherever they were employed in similar work 
would men or women derive the greater benefit from the rule ? 

22. It is urged that a minimum wage should be fixed by law for 
certain industries. Why, or why not ? 

23. Allowing for all the influences thus far considered, what con- 
ditions fix the maximum and minimum limits to the rate of wages 
in a particular case ? What determines the wage actually paid ? 

4. The Specific Productivity Theory of Wages 

The value of labor appears to depend on the efficacy of labor. 
The efficacy of labor in turn depends on the manner in which labor 
is employed. Under certain conditions of demand and supply, labor 
may be used in conjunction with land and capital so inadequate that 
the product of the industry is restricted by the intensive operation 
of the principle of diminishing returns. In such cases where the 
labor force is disproportionately large, the product per laborer will 
be small. 

This suggests the principle that individual wages for a given grade 
of labor will not exceed the amount which is added to the product 
by the effort of the marginal laborer; that if the supply of labor is 



THE DISTRIBUTIVE PROCESS 105 

not excessive, and if laborers are able to exact favorable terms of 
employment on account of competition among persons who wish to 
hire them, wages will not fall substantially below the amount of 
the product added by the marginal laborer. The term "marginal 
laborer" means here, as most commonly, not the least competent 
laborer but the laborer of normal capacity employed under the con- 
ditions least favorable for his productiveness. 

The theory that wages correspond to the marginal productivity 
of labor (i.e., to the productivity of those laborers who are least 
effectively employed) is known as the specific productivity theory 
of wages. Its adequacy to explain actual wages is disputed. At 
least it affords an interesting suggestion for the analysis of the demand 
for labor. 

Questions 

1. Could there be any production without labor? How is it 
possible to estimate the share of the product which labor, as dis- 
tinguished from capital and land, produces? 

2. Could an employer ascertain how much of the total product 
depends on the work of any one laborer? 

3. Why should laborers in general consent to the remuneration 
which conforms to the product of the marginal laborer — i.e., of the 
laborer employed under the most unfavorable circumstances ? Could 
they force the employer to pay more ? 

4. Can the laborers control the conditions which make the mar- 
ginal productivity of labor small ? 

5. Suppose an increase in the number of persons seeking employ- 
ment as laborers without any increase in the number of consumers 
of the products of labor. What will be the effect on wages ? Will 
this effect be due to change in the marginal utility of the product or 
to change in the number of units produced by the marginal laborer ? 

6. Explain, according to the specific productivity theory, how, 
other factors remaining unchanged, wages would be affected by (a) 
increase in the number of laborers; (b) decreased demand for the 
product. Do you arrive at the same conclusion if you answer accord- 
ing to the demand-and-supply theory ? 

7. Does the specific productivity theory of wages take adequate 
account of supply of labor ? How ? Of demand for labor ? How ? 

8. Do differences of wages as between occupations correspond 
to differences in the marginal productivity of labor? 



io6 OUTLINES OF ECONOMICS 

5. Trade Unionism 

a) Causes of Trade Unionism 

b) Trade Union Organization and Demands 

c) Trade Union Theory 

d) Trade Union Policies and Methods 

e) The Social Problem of Unionism 

Trade unions, like railroads and trusts, are an important factor 
in the productive organization of industry. The unions have devel- 
oped into a complex organic network which tends to parallel the 
pecuniary and political organization of society and influences eventu- 
ally the productive process. 

Trade unions are discussed in this outline under the distributive 
process because they are organized to secure, primarily, higher wages, 
shorter hours, and better conditions of employment generally for their 
members. They seek these ends by a great variety of means. Promi- 
nent among these means are: (i) the estabUshment of a standard or 
uniform rate of wages for each kind of work; (2) the fixing of a normal 
or uniform working day or week; (3) the establishment of standard 
or uniform methods of work and processes of production; (4) limita- 
tion and control of the speed and output of the workers; (5) entrance 
restrictions and apprenticeship regulations; (6) arbitration and con- 
ciliation; (7) strikes and boycotts; (8) trade union insurance; and 
(9) labor legislation. 

The activity of trade unions has of late greatly stimulated the 
organization of employers' associations. Some understanding of 
these associations is essential to an estimate of the significance of 
unionism. 

a) Causes of Trade Unionism 

Questions 

1. How do the economic functions, status, and social environment 
of the wage-workers and the employers differ essentially ? 

2. What is it that has caused these differences and what was their 
historical origin ? 

3. Do such differences create diverse notions on the part of workers 
and employers in regard to justice, rights, and importance of economic 
functions ? 

4. If you were a wage-worker should you feel that your interests 
and those of your employer were essentially opposed in any vital 
matters? 

15. Under the conditions of capitalistic production and distribu- 



THE DISTRIBUTIVE PROCESS 107 

tion what advantages has the individual employer over the indi- 
vidual worker in the bargaining which immediately fixes wages and 
conditions of employment ? 

6. Under modern conditions is the employer disposed or forced 
to exercise to the full extent any bargaining advantage which he may 
have over the workers ? 

7. Under what circumstances and in what ways might trade 
unions be of distinct advantage to employers ? 

8. As a matter of historical fact, when and under what circum- 
stances were trade unions first organized ? 

9. Are unions at the present time usually of spontaneous origin? 
What circumstances ordinarily lead to their organization ? 

b) Trade Union Organization and Demands 

Questions 

1. What are the essential differences between a trade union, an 
industrial union, and a labor union ? Name an example of each 

2. What is a local union? What is a national or international 
union? What are the general relations between the local and the 
national union? 

3. What are the principal union officers? Describe the duties 
ordinarily performed by the secretary, the organizer, the walking 
delegate or business agent. What is the sovereign union authority ? 

4. What is the American Federation of Labor ? What is its rela- 
tion to the various local and national unions ? What are its policies ? 

c) Trade Union Theory 

Questions 

1. Some unionists look with disfavor upon the individual who 
"uses up more than his share of the demand for work." Examine 
the practical validity of this attitude. 

2. Why do unions attempt to estabHsh the principle of uniformity 
with respect to wage-rates, hours of work, and conditions of employ- 
ment generally in a trade ? 

3. By what arguments do unions support their attempts to 
limit and control the speed and output of workers? 

4. On what grounds do unions attempt to limit the numbers and 
control the workers in a trade ? 

5. Employers claim that unions attempt to prevent the introduc- 
tion of machinery and improved processes. How would union advo- 
cates justify such attempts ? 



io8 OUTLINES OF ECONOMICS 

6. Unionists claim that "high wages breed high wages." On 
what assumptions is this claim based ? Are they legitimate assump- 
tions ? 

7. Can shorter hours and better conditions of employment be 
secured by all workers without lowering the wages of some ? 

8. When one set of workers secures higher wages without a corre- 
sponding increase of output, must someone else suffer ? If so, who ? 

9. Will increase of the efficiency of one group of workers neces- 
sarily increase their wages or make it possible for them to secure higher 
wages ? 

ID. If the anthracite coal miners forced the mine owners to grant 
a 20 per cent increase in wages, who might foot the bill ? 

d) Trade Union Policies and Methods 

Questions 

1. What is the practice of unions in regard to the admission of 
members? If the union refuses to admit a capable man does the 
union gain ? Does anyone besides the debarred worker suffer ? 

2. What is the poHcy of unions in regard to apprenticeship? Is 
union apprenticeship an effective method of training skilled workers ? 
What are the actual purposes of unions in maintaining the apprentice- 
ship system ? 

3. Unionists claim that they favor industrial education "when 
it does not play into the hands of the employers." Explain this 
statement. 

4. Most unions demand and attempt to enforce the union or closed 
shop; most employers are bitterly opposed to it. Why in each case ? 

5. Unions attempt to estabUsh a minimum wage for each kind 
of work and a maximum number of hours that a man may work. 
Why, in each case ? 

6. In many recent wage disputes agreement was reached by three 
men — a representative of the employers, a representative of the unions, 
and a third chosen by these two. What is this mode of settling 
disputes called ? 

7. Distinguish arbitration, concihation, and collective bargaining, 
and compare their advantages as methods of regulating the conditions 
of employment. 

8. What is a trade agreement ? 

9. Are strikes as such beneficial to union laborers? On what 
grounds do unionists justify the resort to strikes ? 

ID. What is a sympathetic strike ? 

II. In the last telegraphers' strike in Chicago workers in front 



THE DISTRIBUTIVE PROCESS 109 

of the Western Union offices were arrested for "vagrancy." What 
strike duty were they performing at the time ? 

12. Unions are violently opposed to "scabs" and "rats," and such 
persons frequently fall into the hands of "educational committees." 
Explain the meaning of this statement. If you were a unionist 
should you have the same attitude toward scabs, and if so, why? 

13. In a labor controversy the employer sometimes discharges 
all the workers; what is this action called? Has the employer a 
right so to discharge ? 

14. What is a blacklist? What is a "whitelist"? 

15. What is the consensus of judicial decisions in regard to the 
legality of (a) sympathetic strikes ? (b) picketing ? (c) the boycott ? 
(d) blackHsts ? Can you detect any general principle underlying these 
decisions ? 

16. What is an injunction? Why are injunctions especially 
effective in suppressing strikes ? What changes in the law concerning 
injunctions are desired by the unions ? Why ? 

17. Do the unions act as effective employment agencies? Why 
does a good unionist demand "union labor goods" ? 

18. What are the main methods used by employers' associations 
in fighting unions ? 

19. Are all employers' associations "union smashers"? What 
conciliatory or constructive functions may such associations perform ? 

20. If employers' associations continue to develop until practically 
all employers are associated in such organizations, will the position 
of the union laborer be better than the position of the individual 
laborer was before the days of collective bargaining ? 

e) The Social Problem of Unionism 

Questions 

1. Samuel Gompers believes that trade unions are one of the 
greatest educative forces in the country. Can you find grounds for 
this belief? 

2. If all workers belonged to unions, could wages and con- 
ditions of employment be bettered for all by union policies and 
methods ? 

3. It is said that unions create an aristocracy of labor. Is it 
better socially to have a few workers highly paid and many poorly 
paid than to have all workers very moderately paid ? 

4. In some trades the American standard of living is threatened 
by the competition of immigrants satisfied with low wages and poor 
living conditions. Are the unions performing a social service in 



no OUTLINES OF ECONOMICS 

attempting to maintain the American standard in these trades at 
all hazards and by all means ? 

5. If trade unions and employers are opposed, industry is likely 
to be unproductive and the public service interrupted; if the unions 
and employers combine, monopoly is likely to be the outcome. Is 
there any escape from this dilemma ? 

6. Would it be well to have a law in the United States similar 
to that of New Zealand providing for the compulsory arbitration of 
trade disputes? What is the attitude of the employers and unions 
in this country toward compulsory arbitration, and why? 

7. Would it be well to have a law in this country providing for a 
government investigation of all cases where strikes or lockouts are 
threatened in public utilities and mines, and for the publication of the 
facts before a strike or lockout should be permitted ? 



IV. Interest 



1. Introductory 

2. The Demand for Capital 

3. The Supply of Capital 

4. General Questions on Interest 



I. Introductory 

Interest is the income from the use of capital. It is a part of the 
social dividend and represents the payment for the services of capital. 

Capital has been defined as wealth used for further production 
— i.e., as producers' goods. The brief discussion of capital which was 
attempted under the head of " The Productive Process " conformed to 
such a definition, treating of social capital rather than acquisitive capital, 
and dealing with the tangible forms of capital, or capital goods, rather 
than with the loanable fund of purchasing power, which, expressed 
in dollars and cents, constitutes pecuniary capital and conveniently 
measures the aggregate of tools, machinery, material, or other goods 
which it is used to buy. 

For the analysis of the problem of interest a more inclusive view 
becomes imperative. In the first place there are some forms of con- 
sumers' goods which, while not capital to society, still are not used 
directly to satisfy the wants of the owner, but only as a means of 
obtaining an income — e.g., a dwelling rented to another person. 
These goods, called acquisitive capital, yield interest, and are not 
in practical affairs sharply differentiated from producers' goods. 
In the second place the saving and lending of capital, and the reckon- 



THE DISTRIBUTIVE PROCESS in 

ing of the amount of capital, are accomplished most familiarly and 
easily in terms not of concrete goods, but of value, and especially in 
terms of money-value — pecuniarily. We must, then, give present 
attention to the concept of capital as a fund, partly to be invested in 
producers' goods, partly to be used in purchasing acquisitive forms 
of consumers' goods, and even in some part to be loaned and dissipated 
in luxurious expenditure, but always with the expectation of a return — 
the interest which is now to be explained. 

The business man, as has previously been suggested, frequently 
speaks of the sum total of wealth invested in his business as his capital, 
regardless of whether this wealth consists of land, machinery, or wages 
advanced to labor. Similarly, he is apt to speak of the return from 
any income-yielding investment as interest, irrespective of the ques- 
tion whether the income is derived from capital, land, or any other 
source. 

The question where to draw the line between interest and profits 
in particular is something upon which economists have not entirely 
agreed. For present purposes we may, however, distinguish : (a) the 
net return to capital, as determined by competitive conditions, without 
reference to the special form which the capital takes, and apart from 
any allowance for loss; {b) the gain or loss attributable to the way in 
which the capital is used, and including elements of compensation 
for industrial risk, of wages of skilled management, and of the excep- 
tional return due to exceptional bargaining position. The factors 
enumerated under {b) do not strictly belong to the interest problem. 
They will be considered in the study of profits. 

Questions 

1. Can any part of the earnings of a bootblack be called interest? 

2. Is the income derived from the following interest: a railroad 
bond; a share of stock in a land company; a share of stock in a coal- 
mining company ? 

3. A business man receives a salary of $10,000 a year as president 
and manager of a shoe-manufacturing concern ; he receives a dividend 
on some stock in the same company which he happens to own; he 
is an active partner in a profitable leather firm; he owns a 5 per cent 
mortgage on some city real estate, 100 shares of stock in the United 
States Steel Corporation, and 50 shares in the American Tobacco 
Company; and he has a savings bank deposit paying 3 per cent. To 
what extent does the element of interest enter into each of these 
varieties of income ? 

4. When a concern declares an unearned dividend is the stock- 
holder getting interest ? 



112 OUTLINES OF ECONOMICS 

2. The Demand for Capital 

a) The Demand for Capital Goods 
h) The Demand for Funds 



a) The Demand for Capital Goods 

Questions 

1. Is the demand for capital goods a derived demand? a joint 
demand? an elastic demand? a demand ai^ected by the principle 
of substitution? 

2. Is there a composite demand for (a) coal ? {b) sewing machines ? 
(c) churns ? {d) nails ? (e) gasoHne engines ? 

3. Explain whether, in what sense, and under what conditions the 
demand for each of the following commodities constitutes or involves 
a demand for capital goods: (a) steel rails; {b) overalls; (c) wheat; 
{d) candy; {e) wild flowers. 

4. How would a rapid increase in the supply of labor affect the 
demand for (o) labor-saving machinery ? {b) labor-equipping tools ? 

5. Does the demand for a capital good depend upon its produc- 
tivity ? 

6. What is meant by the productivity of- capital goods ? Answer 
this question with reference to {a) a hammer; (6) a locomotive; 
(c) raw wool; {d) seed-grain; (e) grape-juice as it comes from the 
wine-press. 

7. Are capital goods usually sold or hired? Are we concerned 
with demand for the goods, or with demand for their services ? 

b) The Demand for Funds 

i. Long-Run Demand 
ii. Momentary Market Demand 



i. Long-Run Demand 

Questions 

1. Is the demand for loanable funds a derived demand? a joint 
demand ? an elastic demand ? a composite demand ? a demand 
affected by the principle of substitution ? 

2. What do you think of the proposition that the demand for 
pecuniary capital is derived from the demand for capital goods? 
Can you reconcile this statement with ihe fact that pecuniary capital 



THE DISTRIBUTIVE PROCESS 113 

is the purchasing power which makes the demand for capital goods 
effective ? 

3. Is the demand for loanable funds due entirely to demand for 
producers' goods ? 

4. What was the prevailing attitude toward money-lenders in 
the Middle Ages? Do we today assume the same attitude toward 
bankers who provide the funds for business enterprise ? Why ? 

5. Why do people who borrow money to buy consumers' goods 
which result in no new product have to pay the same rate as if they 
were borrowing to pay for productive capital ? 

6. How should you expect the demand for pecuniary capital to 
be affected by increase in the supply of labor ? 

7. Would a new and important invention increase the demand for 
pecuniary capital ? 

8. In what sense is pecuniar}^ capital productive ? 

9. Is capital in the pecuniary form more usually sold or loaned ? 
In the study of interest are we ordinarily concerned with the value 
of such capital or with the value of its ser\dces ? 

ID. Is it demand for capital funds or demand for the use of such 
funds which, strictly speaking, bears upon the problem of the interest- 
rate? 



ii. Momentary Market Demand 

Questions 

1. During a flurry of the stock market is the demand for loans on 
the part of speculators trying to "cover" likely to bear any close 
relation to the productivity of capital goods in industrial use ? 

2. Why is there an excessive demand for loans in time of financial 
panic? Is industry particularly productive at such times? Are 
people in general increasing their investments? 

3. Why are the banks in this country so often led to a dangerous 
extension of loans during the early autumn? 

4. The rate of interest on "call loans" is ordinarily lower than 
the rate on loans for a long period; but in time of panic call-loan 
rates may rise far above the general interest-rate. Can you account 
for this phenomenon on the ground of exceptional conditions of de- 
mand? 



114 OUTLINES OF ECONOMICS 

3. The Supply of Capital 

a) The Supply of Capital Goods 

b) The Supply of Funds 



a) The Supply of Capital Goods 

Questions 

1. Is the supply of capital goods, as commodities, subject to (a) 
physical limitation ? (b) social limitation ? (c) monopoly control ? (d) 
the principle of cost of production ? Give examples. 

2. Is the investment of capital limited by the conditions which 
limit the supply of capital goods ? 

3. Does the productivity of a given kind of producers' goods bear 
any relation to the supply of such goods ? 

b) The Supply of Funds 

i. Long-Run Supply 
ii. Momentary Market Supply 



i. Long- Run Supply 

(i) The Savable Surplus 
(2) The Motives to Saving 

The analysis of the supply of capital is somewhat aided by the 
above distinction between the savable surplus and the motives to 
saving — or, in the phraseology of John Stuart Mill, between the 
amount of the fund from which saving can be made, and the effect- 
ive strength of the desire for accumulation. The distinction is, 
however, arbitrary. Plainly, what is "savable" depends on how 
much privation persons will undergo because of their desire to save. 
No attempt has been made to separate the following questions into 
two groups; but students should bear in mind, when discussing them, 
the two aspects of the supply of funds which are here suggested. 

Questions 

1. Could an individual save and accumulate capital if all the 
goods which his utmost efforts could acquire barely maintained him 
in a hand-to-mouth existence ? 

2. Could capital be accumulated within a country where the total 
amount of available goods would barely suffice to keep alive the 
present number of inhabitants ? 



THE DISTRIBUTIVE PROCESS 115 

3. Does accumulation of capital facilitate further accumulation ? 
How? 

4. What is saving ? Distinguish the saving of capital from hoard- 
ing. 

5. Would not some persons refrain from using all their income and 
lay by money "against a rainy day" even if there were in the mean- 
time no opportunity to derive a return from its investment ? If so, 
why should interest be paid for loans ? 

6. It is said that the rate of interest has to be sufficient to com- 
pensate the sacrifice made in saving the last or marginal unit of 
capital — the unit which represents the greatest sacrifice in saving. 
Why or why not ? 

7. The disinclination to save without compensation is sometimes 
stated to be due to the fact that persons ordinarily prefer present 
goods to future goods; the extent of this preference being indicated 
by the interest-rate necessary to induce saving. Try to draw up 
an analytical scheme of the reasons for thus discounting a future good. 
Do people fear they will never reahze the good ; or that its significance 
will not be the same when it comes; or are they merely too impatient 
to wait ? 

8. Suppose that a typical college student of twenty were offered 
(a) money to pay for his education; (b) a theater ticket; (c) a suit 
of clothes in the present style; (d) five years' life insurance; (e) a 
mahogany dining-table; and suppose that in every instance he were 
given the option of having the gift at once or ten years later. How 
would he choose, and why ? 

9. Vary the conditions of the previous problem by supposing that 
the dining-table were offered now or not at all, and that the money 
for education were promised at a date ten years later. Would the 
recipient be willing to borrow money at interest to anticipate the 
money-gift ? Would he be willing to pay storage on the table until 
he had need of it ? What light do your answers throw on the ques- 
tion of the inclination or disinclination to save ? 

10. Does the necessity of saving exist because of the present organi- 
zation of society ? Would there be " saving " in a socialistic society ? 
If so, who would do the saving ? 

11. "Capital, though saved, and the result of saving, is neverthe- 
less consumed. The word saving does not imply that what is saved 
is not consumed, nor even necessarily that its consumption is de- 
ferred." Explain. Who is the consumer? Is the consumption 
usually deferred? 

12. It has been said that the original formation of capital is due to 
abstinence or saving, but its permanent maintenance is not. What 
do you say to either statement ? 



ii6 OUTLINES OF ECONOMICS 

13. How would an increase in the efficiency of industry affect 
the supply of capital ? 

14. In what ways might a more general and a better education of 
the people affect the supply of capital ? 

15. How would a rise of the standard of living affect (a) the 
savable surplus ? (b) the motives to saving ? 

16. How does the constant breaking out of war among the Central 
American states affect their supply of capital ? 

17. Is the effective desire of accumulation stronger in the United 
States than in Central America ? Why ? 

18. What is it that prevents capital from increasing indefinitely ? 
Provided the disposition to save remains the same, would as much be 
saved if the return to capital and labor constantly diminished ? 

19. "The supply of capital is limited by considerations of cost, 
in two forms: (a) the cost of production of capital goods, and (b) 
the cost, or sacrifice, of saving." Do you agree with this statement ? 
What is the remuneration for each of these elements of cost ? 

ii. Momentary Market Supply 

Questions 

1. How would such a disaster as the destruction of San Francisco 
affect the supply of capital ? 

2. Can you explain high interest- rates in time of financial panic 
on the ground of reduced supply of loans ? Why should the supply 
be reduced ? Is there less desire to save under such circumstances ? 

3. Banks commonly loan money "on call" at very low rates. 
How can the bank afford to do this ? Why does not the demand for 
capital for industrial purposes force the rate up? Could the con- 
struction of a railway be financed by call loans ? 

4. What is the "money market"? Who are the buyers and 
sellers ? What do they buy and sell ? 

5. It is said that interest is paid for capital, not for money. Is 
this true ? 

6. The economic history of the United States shows that repeat- 
edly, in sections of the country where capital was scarce, the people 
have clamored for a more abundant currency. Do you think that 
this would have removed their difficulty? 

7. Does the supply of money on the market affect the rate of 
interest ? 

8. When gold is leaving England the Bank of England raises the 
rate of discount. Does this show that the amount of money deter- 
mines the rate of interest ? 



THE DISTRIBUTIVE PROCESS 117 

4. General Questions on Interest 

Questions 

1 . Try to formulate, in a few words, a specific productivity theory 
of interest on the analogy of the specific productivity theory of wages. 

2. Can you reconcile the statement that the rate of interest is 
determined by the marginal productivity of capital with the state- 
ment that it is determined by demand and supply? 

3. It has also been stated that it is the difference between the 
estimation of the present value and the estimation of the future 
value of the last unit of capital saved which determines the rate of 
interest. Can you reconcile this with the previous statements ? 

4. If producers' goods merely replaced themselves — i.e., added 
to the product of industry an amount equal to their own value as 
commodities — would there be any basis for the payment of interest ? 
Would capital be saved ? Would producers' goods be made ? 

5. How can you explain the fact that several centuries ago the 
rate of interest on investments in Holland was around 2 per cent, 
while today it is considerably above that ? 

6. Can legislation effectively regulate the rate of interest ? 

7. Is interest different from usury ? If so, what is the difference ? 

8. Would industry benefit if the maximum rate of interest were 
legally fixed at 3I per cent ? 

9. What economic results would ensue if the charging of interest 
were prohibited by law ? 

10. Is capital mobile ? Does it move freely from one country to 
another ? How extensive is the market for capital ? 

11. Are there differences in the rate of interest as between different 
places or different occupations which cannot be explained by differ- 
ences in risks ? 

12. Why has the rate of return on investments been around 10 
per cent in the West, 7 per cent in the Central states, 5 per cent in 
New York, and 4 per cent in Germany ? 

13. Does the net return from an investment in capital such as a 
steel plant tend to equal the net return from the same amount of 
money invested in land, assuming the risk to be the same ? 

14. Are all investments in specialized capital likely to prove 
equally profitable ? Why ? 

15. Suppose that a newly invented machine at present pays more 
than the prevailing rate of net return on its cost price. Is this 
situation Hkely to continue ? Under competitive conditions, will the 
earning power of the new machine and the earning power of other 
machinery ultimately be equalized ? How ? 



ii8 OUTLINES OF ECONOMICS 

i6. The selling-price of a machine is said to be determined by: 
(a) its cost of production; (b) the total value it is expected to add 
to what could have been produced without it; (c) the prevailing 
interest-rate. Criticize these statements. Can they be reconciled ? 



V. Profits 



1. Introductory 

2. The Risks of Industry 

3. General Questions on Profits 



I. Introductory 

Profits are the share of the industrial product which goes to the 
entrepreneur. The chief elements entering into profits are: 

a) The wages of management, a return for assuming the labor and 
burden of management. This element tends to equal the amount 
which the manager could get if he were employed at a fixed salary. 
Some economists prefer to classify this under the head of wages. 

b) A gain or loss resulting from the risks inevitable in industry. 
Not only is there uncertainty in undertaking a new industry, but 
the more or less extended period of time required for production leaves 
any industry subject to the risks arising from chance or uncertain 
events. 

c) An acquisitive gain due to superior bargaining power, resulting 
from monopolistic or other conditions. For example, monopoly or 
a position of particular advantage may enable the charging of higher 
prices for products, the paying of lower prices for materials, the con- 
trol of labor supply, the acquisition of special privileges from public 
and semi-public bodies, such as low taxation and railway rebates, etc. 

Questions 

1. Are the following entrepreneurs: a cobbler, a farmer, a consult- 
ing engineer, the boss of a section gang, a banker ? 

2. In a corporation there may be bondholders, stockholders, 
directors, a president, a treasurer, and a general manager. Who is the 
entrepreneur ? Who receives profits ? 

3. Should the income of an inventor be classified as wages or 
profits ? 

4. A promoter buys up various street railway lines, forms a 
new company, which is greatly over-capitalized, and sells the stock 
at a gain. Is the gain profit, and if so, what kind of profit ? 

15. What sort of profit do you think has been the basis of most of 



THE DISTRIBUTIVE PROCESS 119 

the more recently acquired large fortunes in this country ? Are they 
the result of acquisitive or of productive effort? What have the 
owners done to serve society ? 

6. The syndicate which underwrote the securities of the United 
States Steel Corporation is said to have made over $60,000,000. 
Was that profit ? Do you think it was earned ? 

7. Give instances, taken from the actual business world, in which 
profits are to be regarded as essentially (a) wages of management; 
(b) the result of a fortunate issue of a risky enterprise; (c) due to 
monopoly of the sale of the product; (d) extortion from underpaid 
laborers; (e) "graft," under the form of franchise privilege, or of 
immunity from prosecution for illegal acts. 



2. The Risks of Industry 

a) The Nature of Industrial Risks 

b) Speculation in Relation to Risks 

c) Insurance in Relation to Risks 



a) The Nature of Industrial Risks 

Questions 

1. Describe some of the chief risks in industry. Group these into 
classes. 

2. Is the process of production in modern industry spread over a 
longer period of time and is it more roundabout than formerly? 
How does this affect risks ? 

3. If everyone endeavored, year after year, to make the same 
articles in the same way, to sell the same quantities at the same 
prices, and to buy the same variety of goods at the same shops, 
would the risks of business disappear ? 

4. Are risks greater in a changing condition of industry ? Why 
or why not ? 

5. Assuming that industrial methods are constantly changing, 
should you agree to the suggestion that those persons who are pioneers 
in introducing the new methods make profits because of the change, 
and that those who cling to obsolete methods are commonly losers ? 
Explain your answer. 

6. Is it possible by foresight and calculation to reduce or to avoid 
some of the risks of industry ? all of the risks of industry ? 

7. Do you think that some men have special abihty to grapple 
successfully with the risks and changes of business ? If their ability 



120 OUTLINES OF ECONOMICS 

were recognized as characteristic would they not command high 
salaries as managers ? 

8. Is the theory of differences of wages according to differences 
of abiHty sufficient to explain the business man's gains from successful 
running of risks ? Would it explain losses ? 

9. If we were to have a socialistic society would risks disappear ? 

b) Speculation in Relation to Risks 

We may distinguish two forms of speculation: (a) industrial; 
(b) commercial. Industrial speculation consists in preparing for 
market, by changing the form, products the demand for which is 
uncertain, or products whose conditions of production are unknown or 
shifting. Commercial speculation consists in buying goods in one 
market and selling them in another where different price conditions 
prevail, or in buying at one time for sale at a more or less remote 
time. A certain degree of speculation is inherent in all competitive 
business. Successful speculation involves profits; the speculator 
is, however, always exposed to losses. 

Both industrial and commercial speculation are carried on largely 
by persons who make a careful study of conditions of supply and 
demand, and are therefore better fitted to perform this function than 
are others. The chances of sudden wealth, however, attract to the 
speculative market large numbers of men who have no special knowl- 
edge of conditions affecting the goods in which they deal. Not only 
do they usually suffer personal losses; but through rash buying when 
prices tend to rise and precipitate selHng when prices tend to fall 
they exaggerate the natural tendency toward price fluctuation. There 
are also men who are skilled in market conditions who manipulate the 
market and cause fluctuations which would not otherwise exist. 

When a speculative market has developed, the actual producers 
of commodities can frequently transfer many of the risks of price 
change to the professional speculator. In a speculative market 
contracts for purchases or sales may be made at any time, to mature 
at some future period. A man who contemplates producing pig 
iron may insure himself against a price insufficient to cover materials 
and other expenses by seUing pig iron for future delivery to a specu- 
lator. If the price of pig iron declines it is the speculator who bears 
the loss. When the finished product is not of a character to admit 
of speculative dealings, the manufacturer may nevertheless insure 
himself against serious price fluctuations by speculative dealings 
in the raw materials, since the finished product and the raw material 
usually undergo parallel price fluctuations. 

An example will illustrate. A miller buys in February 10,000 



THE DISTRIBUTIVE PROCESS 12 1 

bushels of wheat to turn into flour which he has contracted to deliver 
June I, at the market price then ruling. To avoid the risks of a 
change in the price of wheat in the interval, and of a consequent 
change in the market price of flour at which he will have to sell, 
he "hedges" by selling "short," for future delivery, 10,000 bushels 
of "May wheat" at the same time that he buys for cash in February, 
If quotations are for 

Cash wheat in February $1 .02 

May wheat in February i .04 

Cash wheat in May i.oi 

then the transaction will be as follows: 

February Wheat Account May Wheat Account 

Cost of cash wheat $10,200 Received for "short sale" of 

Storage, insurance, interest, May wheat in February . . . $10,400 

etc 195 Cost of cash wheat in May to 

"cover" 10,100 

Total cost of wheat $10,395 " 

Value in May of the wheat used Profit on transaction 

in making the flour 10,100 



Miller's loss by fall in price.. $295 

Thus, though the miller's decision to buy his wheat in February 
results in a loss of $295, on account of the lower price of wheat in 
May, the "hedging" transaction offsets this loss by a gain of $300. 

Questions 

1. Work out the above case of deaHng in wheat, substituting, as 
the price of cash wheat in May, (a) $1 .08, (b) $0.90. 

2. A certain cotton manufacturer displays great ability in the 
production of cloth, but he is nevertheless barely able to keep his 
head above water, because he is a poor judge of the raw cotton market 
and is more likely than not to buy when prices are inflated. Show 
how he could liberate himself from the consequences of this defect 
of judgment. 

3. Miller A always covers purchases of wheat for milling by 
corresponding short sales. Miller B boasts that he is no speculator, 
and refrains entirely from transactions on the exchange. Whether 
prices rise or fall, A is insured his miller's profit, and never receives 
more. If prices rise, B makes a profit over and above his miller's 
profit. When prices fall, not only may his miller's profit be wiped 
out, but he may incur additional losses. Which one is really the 
speculator ? 

4. In 1906 a shipment of Dakota grain was sent by way of Seattle 
to Japan. By the time the grain reached Japan the price of wheat 



122 OUTLINES OF ECONOMICS 

there had fallen so low that this shipment was reconsigned to Liver- 
pool, and sold at a price inferior to that paid for the wheat in Dakota. 
Did the actual shippers of the wheat necessarily lose on the trans- 
action ? 

5. Speculators are often regarded as mere gamblers. If the whole 
body of speculators were to cease bujdng and selling grain, and limited 
themselves to betting upon the course of prices, would the work of 
commerce and industry be carried on exactly as it is at present ? 

6. Farmers often urge the abolition of speculative exchanges on 
the ground that they depress the price of produce; millers and spinners 
urge this abolition on the ground that they enhance prices. What 
is your opinion of the situation? Do you think it is true, as has 
been contended, that short sales create an artificial increase of supply, 
and necessarily lower prices for that reason ? 

7. Do men speculate because prices fluctuate or do prices fluctuate 
because men speculate ? 

8. It has been maintained that grain-speculators as a class cannot 
gain by a rise in price of their own creating. Why ? Do the same 
reasons prevent individual speculators from manipulating prices to 
their own advantage ? 

9. Would the foregoing statement hold true of speculators on the 
stock exchange ? Why ? 

10. Would speculation be destroyed if the organized speculation 
of the exchanges were prohibited by law ? 

11. Short sales of land are by nature impossible. Does this 
fact interfere with speculation in land, or make such speculation less 
hazardous than speculation in produce or securities ? 

12. During the Civil War certain wool manufacturers made 
enormous profits because of the rise in price of raw materials which 
they had on hand. After the war there were cases where these profits 
were nearly wiped out by losses consequent upon the fall in prices 
of raw materials. Explain. Could the loss have been avoided? 

13. "Industrial speculation anticipates the wants of society. If 
the speculator has judged wisely, society is better provided with 
goods than it would have been had its entrepreneurs been averse to 
taking chances. If the speculator has miscalculated, he incurs a 
pecuniary loss and society suffers from wasted resources." Is this 
true? Write out a similar statement concerning commercial specu- 
lation. 

14. It is argued that if a shortage of a staple commodity occurs, 
a rise in its price is a social advantage. Explain, using as illustrative 
commodities (a) ice; (b) sugar; (c) structural steel. 

15. State briefly your opinion of the relation of speculation to 
industry. 



THE DISTRIBUTIVE PROCESS 123 

16. How do you distinguish between socially desirable and socially 
undesirable speculation ? 



c) Insurance in Relation to Risks 

The discussion of speculation showed that in many cases specu- 
lative markets make insurance against risks possible. Insurance is 
treated in this present section with particular reference to the definitely 
organized business of insurance, e.g., fire insurance, etc. 

Questions 

1 . Why do people insure against risk ? Does insurance decrease 
risks ? 

2. What is the service performed by an insurance company? 
Is insurance productive ? 

3. What determines the premium paid for insurance? In the 
long run, do premiums paid exceed in aggregate amount the settle- 
ments for losses ? If so, how can a person afford to carry insurance ? 
If not, how can insurance companies remain solvent? 

4. Suppose one concern owns buildings in a great many different 
places, so that the fire risk is distributed. Would it pay better to 
insure in a fire insurance company, or merely to set aside a reserve 
against losses ? For example, should the Pennsylvania Railroad Co. 
insure its station buildings? Should the Postoffice Department 
insure the fittings of rural post-ofiices? 

5. Does insurance, such as fire insurance or plate-glass insurance, 
enter into the cost of production ? 

6. Is the number of fires Ukely to be increased by the fact that 
buildings are insured ? 

7. In some cities the fire-insurance companies contribute heavily 
to the maintenance of fire departments. Is this properly a part of 
the insurance business ? 

8. One insurance company has insured buildings pretty generally 
throughout the country; another has confined itself exclusively to 
a certain city. With which should you prefer to insure your property, 
and why ? 

9. Insurance, like speculation, has sometimes been Hkened to 
betting. I pay $36 to a certain company: if my house burns down 
within three years, the company pays me $3,000. This means, in a 
certain way of thinking, that I bet $36 against $3,000 that my house 
will burn down. Is this a proper view of the situation ? If I were a 
gambler by disposition, should I be likely to insure my house ? 

10. At the time of the coronation of King Edward VII London 



T24 OUTLINES OF ECONOMICS 

tradesmen took out insurance against his death. Again, when King 
George V was crowned, the rain-insurance reached very large figures. 
Why? Is such insurance of benefit to society? 

11. Is it possible for manufacturing concerns to unite, apply fire 
protection scientifically, exclude those who will not protect, and 
reduce fire losses to a minimum ? Is that an advantage to society ? 

12. Why are there no insurance companies that undertake to 
insure producers against price fluctuations ? 

13. Why should not insurance companies undertake to bear the 
risks of business and to pay (or charge) to entrepreneurs a fixed 
annual sum in commutation ? 



3. General Questions on Profits 

The student should keep in mind the fact that the subject of 
profits covers losses as well as gains. Differences in profits are not 
simply the difference between a large profit and no profit, but also 
the difference between a large profit and a heavy loss. 

Questions 

1. Do profits tend to an equiUbrium as between different indi- 
viduals ? different occupations ? different places ? 

2. It is said profits and losses in a given industry tend to balance 
each other. Is this true of gold mining ? Why or why not ? 

3. Are differences in profits due more to skill and ability than to 
chance ? 

4. Are the profits of a business man a good measure of his service 
to society in the production of wealth ? 

5. "Profits are analogous to rent in that the skilled risk-taker 
gets a differential return over the risk-taker of ordinary capacity." 
Why or why not ? 

6. Do profits enter into cost of production ? 

7. If an industry were generally depressed, but one employer were 
by exception making high profits, what rate of wages would he pay ? 
If industry were prosperous, but one employer were by exception 
making no profit, what rate of wages would he pay ? 

8. "The entrepreneur is the residual claimant of industry." 
What does this mean ? Do you think the statement is true ? 

9. According to the specific productivity theory land, labor, and 
capital tend severally to receive returns commensurate with their 
respective productive services. If this is true, what is left for the 
entrepreneur ? 

10. Is business management to be regarded as a fourth pro- 



THE DISTRIBUTIVE PROCESS 125 

ductive factor, co-ordinate in importance with land, labor, and capital, 
or is it merely the proper proportioning of those three factors ? 

11. In a new industry, or when new methods are introduced into 
an old industry, profits are said to be due to the temporary, exceptional 
productivity of land, labor, and capital which are nevertheless paid 
for at the rates previously paid in other industries. If so, would 
profits disappear as soon as the new industry was established on a 
basis of general competition ? 

12. After a change in industrial methods which greatly increases 
productive capacity, profits are commonly no greater than before; 
yet after all we depend on the self-interest of the entrepreneur and 
his desire for profit to secure both (a) the introduction of better 
methods and (b) their maintenance after introduction. Explain how 
this can be. 

13. "Monopoly profits are more likely to be permanent than 
competitive profits." Do you agree ? 

14. In what way will a sudden depreciation of the currency aflfect 
profits ? a sudden appreciation ? 

15. "Profits as a return for risk is nonsense. We know that 
many men engage in industry because they love independence and 
delight in risks. They would engage in industry even if there were 
no return to risk." Comment. 

16. "Profits are a great factor in promoting economic progress." 
" Profits are unnecessary. These gains should go to the other factors 
of production." With which statement do you agree? Does it 
make any difference whether the profits spoken of are monopoly 
profits or competitive profits ? 

17. What definition of profits do you accept? 

18. Could it be said that profits are determined by the demand for 
business management and the supply of managerial ability ? 



G. PUBLIC FINANCE AND TAXATION 

I. The Forms of Public Expenditure 
II. The Sources of Public Revenue 



I. The Forms of Public Expenditure 

Questions 

1. Draw up a classified list showing the more important items of 
expenditure of the federal, state, and local governments in the United 
States. 

2. Why should the following facilities and services be provided by 
the government rather than by private persons: military defense; 
police; administration of justice; postal service; roads; street- 
lighting; lighthouses; improvement of rivers and harbors ; preserva- 
tion of forests; agricultural experiment farms; parks and play- 
grounds; sewers; medical examination of school children ; hospitals; 
asylums; poor relief; protection against fire; libraries; museums? 

3. From a purely selfish viewpoint is it to the advantage of par- 
ticular individuals to avoid the payment of taxes ? Would it be ad- 
vantageous if everyone avoided taxation ? 

4. If the government renders services which are greater in pro- 
portion to the money spent than individuals could procure for them- 
selves, should the poor be exempt from contributions to the support 
of government ? 

5. Should government expenditures be absolutely small, or merely 
small in relation to the benefits to be secured ? 

6. Are government activities in general, at the present day, increas- 
ing in scale? In range? Why? Does this imply larger public 
expenditures ? 

II. The Sources of Public Revenue 

1. Public Loans 

2. Public Domain 

3. Public Industries and Investments 

4. Fees and Assessments 

5. Taxation 

I. Public Loans 

By borrowing, a government may utilize unemployed private 
capital in meeting extraordinary needs for expenditures too great 

126 



PUBLIC FINANCE AND TAXATION 127 

to be paid from the ordinary public revenues. The burden of the 
loan can thus be distributed over a series of years by payments for 
interest and sinking fund. Such borrowing may become an abuse 
if it results in pledging the income of the future for merely present 
benefits. It is justifiable in the adjusting of slight temporary deficits, 
and also (i) as a means of tiding over some great emergency, or (2) 
to provide for government investments on capital account from which 
is expected to result either (a) a definite income sufficient to cover 
the interest and the ultimate repaying of the principal of the loan, 
or (b) a real and lasting, though less tangible, benefit accruing in the 
future. 

Questions 

1. A municipality sells bonds (a) to build a schoolhouse; (b) to 
instal a system of sewers; (c) to construct waterworks; (d) to pro- 
vide a public display of fireworks on the Fourth of July. Which of 
these transactions meet your approval ? 

2. During the development of transportation facilities in the 
Middle West several states issued bonds as a means of providing 
money for the construction of canals. Interest on the bonds was to 
be derived from the earnings of the canals, after they were completed. 
Was this a legitimate method of raising revenue ? 

3. In time of war governments commonly borrow to a very large 
extent. Is this good policy ? Does the war provide the means for 
the payment of interest or the repayment of the debt ? 

4. When a government issues paper money in the form of notes 
redeemable in gold on demand is it borrowing ? 

5. What are the advantages or disadvantages of note issue as 
contrasted with bond issue for purposes of public finance ? Do the 
circulating notes bear interest? Are they sure to be ultimately 
presented for payment ? 

6. During the latter part of the Civil War the United States 
government issued large quantities of greenbacks in exchange for 
supplies bought at the high prices^ then prevailing as a result of the 
inflation of the currency by previous issues. Subsequently the govern- 

, ment has been redeeming the greenbacks in gold in times of much 
lower prices. Was the transaction wise ? 

7. The Cleveland administration, at the time of the currency 
troubles of 1893, resorted to the sale of bonds and paid out the pro- 
ceeds in redemption of the greenbacks and treasury notes which were 
being presented for payment. This expedient has been much criti- 
cized. Do you think it was appropriate ? 



128 OUTLINES OF ECONOMICS 

2. Public Domain 

The public domain, which was an important source of revenue 
in feudal times and in monarchies which preserved the usages of 
feudalism, yields little income in the United States. This is due to 
the fact that here the general poHcy has been to grant public lands, 
etc., on easy terms to private owners, rather than to exact payment 
for their use. Possibly the charging of royalties for the use of timber 
and mineral lands and for water power may become more prevalent. 
At present the revenue thus derived is so slight as to be unimportant, 
especially in view of the expenses of maintaining the public domain. 

3. Public Industbies and Investments 

The primary purpoFe of governmental industry may be (1) to 
restrict the use of certain commodities, as opium, alcohol; (2) to 
rendti improved service; (3) to maintain a so-called fiscal monopoly. 
In the first and second ca'^es revenue is more or less incidental; in the 
third the expectation of revenue is the dominant motive. 

Questions 

1. What forms of pubHc industry are maintained in this country, 
and what is the reason for state control in each case ? 

2. Is the government mail service either fiscal or restrictive in 
character ? 

3. What is the purpose of the tobacco monopoly of the French 
government ? 

4. Fees and Assessments 

kfee is a contribution exacted from a person (natural or corporate) 
to defray in part or in full the expense of a specific service rendered 
him by the government: e.g., the fees in connection with court pro- 
ceedings, with the issue of certificates of various sorts, or with special 
facilities rendered by public educational institutions. 

A special assessment is a compulsory contribution, levied upon 
persons who are assumed to derive particular benefit from some public 
facility or service provided primarily for the general good, and appor- 
tioned among them according to their participation in the benefit: 
e.g., assessments for betterments levied on owners of property abutting 
on streets which are widened, paved, etc. 

It should be noted that the services for which fees are charged 
are also rendered with reference to the pubUc good, as is implied by 
their governmental character; but they ordinarily involve the general 



PUBLIC FINANCE AND TAXATION 129 

welfare less obviously than do the services which give rise to special 
assessments, and they are commonly rendered in response to the 
specific request of the person who pays the fee. 

Questions 

1. Do the fees incidental to Htigation interfere with the proper 
administration of justice ? 

2. Would litigation be more prevalent and prolonged if all the 
expenses were borne by the government without the charging of 
fees ? Would this promote justice ? Would it be economical ? 

3. Is it desirable or fair to make the peaceable members of a 
community pay for the contentions of those who are constantly going 
to law ? 

4. Do you know of cases in which the fees collected by pubUc 
officials have exercised a demoralizing influence in politics ? 

5. Is special assessment an appropriate method of paying for 
improvements in a street (a) if the abutting property owners desire 
the improvement ? (b) if they oppose it ? 

6. Do you know of cases in which special assessments have taken 
the form of exploitation of property owners for the benefit of the 
contractors who were given the job ? 

5. Taxation 

a) Canons of Taxation 

b) Forms and Incidence 0/ Taxation 

c) Tax Reform 

"A tax is a general compulsory contribution of wealth collected 
in the general interest of the community from individuals or corpora- 
tions by an exercise of the sovereign power of government, and levied 
without reference to the special benefits which the contributors may 
severally derive from the public purposes for which the revenue is 
required." — U.S. Census Report on Wealth, Debt, and Taxation. 

a) Canons of Taxation 

i. The Principle of Benefit 
ii. The Principle of Ability or Faculty 

Taxation is the principal source of public revenue, yielding in 
this country about three-quarters of the total revenue of the govern- 
ment. Consequently it is of the greatest importance to devise a 
system of taxes which shall be in the highest possible degree efficient 
and equitable. Simplicity, stability, convenience, and economy in 



I30 OUTLINES OF ECONOI\IICS 

collection, with the largest possible yield, are criteria of a good tax, 
The justice of different forms of taxation is tested by certain canons 
or principles of which the most familiar are considered below. 

i. The Principle of Benefit 

Questions 

1. Would it be equitable (a) to tax German subjects in order to 
enlarge the British navy? {b) to tax citizens of California to build 
roads in New York ? (c) to tax the citizens of the United States in 
general to deepen the harbors of coast cities ? {d) to impose a protect- 
ive tariff which raises prices throughout the country for the benefit 
of a local industry ? (e) to tax the rich for the support of poorhouses ? 
(/) to tax the childless for the maintenance of public schools ? 

2. Should you agree that individuals should not be forced to 
support public activities from which they do not consciously benefit 
or that the burden of a given tax should be distributed in proportion 
to benefits received? 

3. If taxation were regulated exclusively according to the prin- 
ciple of benefit, would taxes differ from fees ? 

4. Is it proper for the state to care for needy citizens ? If so, who 
is to pay ? 

5. How could one determine how much a given citizen was bene- 
fited by the construction of a "Dreadnought" ? by the maintenance 
of the Supreme Court of the United States ? 

6. Do the rich or the poor benefit more by the activities of govern- 
ment? Which is the more dependent on government: the man with 
much to gain or the man with much to lose ? 

ii. The Principle of Ability or Faculty 

Questions 

1. Can it be maintained that the well-to-do should pay more tax 
than the poor on the ground that (a) the poor have a right to be sup- 
ported by the wealthy ? {b) the possession of wealth is prima facie 
evidence that the possessor has enjoyed special benefits as a result 
of living under the government which he is asked to support? (c) 
ethically, one should sacrifice himself for others as far as possible ? {d) 
someone must pay, and the poor cannot pay without great hardship ? 

2. Is taxation according to ability a penalty on attainment and a 
premium for sloth ? 

3. What is the test of ability to pay? Is abihty proportional to 
income ? to property ? Is it measured by excess of possessions above 
a minimum regarded as indispensable ? 



PUBLIC FINANCE AND TAXATION 131 

4. Are indirect taxes inequitable in that they raise for all persons 
alike the cost of necessities of life ? 

5. Is equality of sacrifice a satisfactory criterion of the justice 
of taxation ? 



b) Forms and Incidence of Taxation 

i. The General Property Tax 

ii. Customs Duties 
iii. Excise Taxes 
iv. Income Taxes 

V. Inheritance Taxes 

vi. Corporation and Business Taxes 



i. The General Property Tax 

Questions 

1. Who bears the burden of (a) an established tax on land? (b) a 
newly imposed tax on land ? 

2. Who bears the burden of a tax on buildings (a) if the tax is 
imposed after the buildings are constructed ? (b) if the buildings are 
constructed after the tax has gone into effect ? 

3. Should real property and personal property be subject to the 
same sort of taxation ? Should the same tax be levied on (a) land and 
buildings ? (b) furniture and investment securities ? 

4. It is maintained that because of the widespread evasion of taxes 
on intangible personal property, those owners of stocks an,d bonds 
who do declare their holdings are forced to pay in taxes an exorbitant 
proportion of their income. Is their burden heavier than that of the 
landowner ? Why or why not ? 

5. Might a low rate of taxation on intangible personal property 
bring in more than a high rate ? Why ? 

6. If all investments in stocks and bonds were declared for taxa- 
tion would the aggregate value of taxable property be appreciably 
greater than is now the case ? Could present tax-rates be lowered ? 

7. Is a high tax-rate on a low assessment or a low rate on a high 
assessment the more advantageous from the standpoint of (a) the 
taxpayer ? (b) a city desirous to issue bonds ? (c) a landowner trying 
to mortgage his property ? (d) a municipaUty required to pay over, 
out of its receipts from taxation, a fixed number of mills on the dollar 
as a state tax ? 

8. It is contended that the general property tax, by making it 
relatively unprofitable to hold landed property, encourages exhausting 



132 OUTLINES OF ECONOMICS 

cultivation, slaughter of timber lands, and exploitation of natural 
resources in general. Explain. 

g. Is the general property tax equitable ? Is it effectual ? 

ii. Customs Duties 

Questions 

1. What advantages does a system of customs duties offer as a 
means of raising revenue ? 

2. Would customs duties be a satisfactory source of revenue for 
the United States in time of war with a great naval power ? 

3. Make a list of the disadvantages of a system of customs duties. 

4. Should customs duties for purpose of revenue preferably be 
imposed on necessities or on luxuries? on goods with an elastic 
demand or on goods with an inelastic demand ? Does your conclu- 
sion conform to the principle of ability to pay ? 

5. Is a protective tariff an economical method of taxation ? 

6. Mention five commodities on which import duties for purpose 
of revenue would in the case of this country be especially appropriate. 

7. Distinguish between specific and ad valorem duties. Mention 
a commodity on which a specific duty would be the better. Mention 
a commodity on which an ad valorem duty would be preferable. 

8. Who bears the burden of a revenue tariff ? 

9. Who bears the burden and who gets the benefit of a protective 
tariff (a) in so far as the taxed commodities are chiefly imported? 
(b) in so far as the taxed commodities are chiefly produced within 
the country? 

iii. Excise Taxes 

Questions 

1. Define excise taxes. 

2. What advantages does a system of excise taxes offer as a means 
of raising revenue ? How are excise taxes collected ? 

3. State the disadvantages of a system of excise taxes. 

4. For purposes of revenue is it better that excise and customs 
taxes should be levied on the same or on different commodities ? 

5. Do excise taxes discourage home industries and favor the foreign 
manufacturer ? 

6. For the purpose of revenue should excise taxes preferably be 
imposed on necessities or on luxuries ? What is the practice in this 
respect in the United States? Does this practice conform to the 
principle of ability? 

7. Are excise taxes in this country imposed strictly for fiscal 



PUBLIC FINANCE AND TAXATION 133 

purposes ? May they be regarded as being equivalent to sumptuary 
laws, either in effect or by intention ? 

8. Who bears the burden of excise taxes ? 

iv. Income Taxes 

Questions 

1. What has been the chief obstacle to a federal income tax in 
the United States? Has this obstacle prevented state taxation of 
income ? 

2. What has been the chief obstacle to effectual administration 
of state income taxes? Would this difficulty have the same force in 
the case of a federal income tax ? 

3. What is taxation of income at the source ? 

4. For purposes of fiscal administration could income be satis- 
factorily defined ? Does the definition of income include increase in 
the value of property ? Does it exclude allowance for depreciation ? 

5. Should income taxes be progressive? Should incomes below 
a certain amount be exempt from taxation ? 

6. Who bears the burden of an income tax ? 

7. Are income taxes in harmony with the principle of ability? 
with the principle of benefit ? with the principle of equal sacrifice ? 

8. Should you regard an income tax of 33^ per cent as excessive ? 
Is it really heavier than a general property tax of 20 mills on the 
dollar, levied on a 4 per cent security assessed at two-thirds of its 
market value ? 

v. Inheritance Taxes 

Questions 

1. How high a rate should you approve in taxation of inheritances ? 
Has anyone a right to inherit ? to unrestricted inheritance ? 

2. Should inheritance taxes be progressive? If so, should the 
progression be based on the amount of the estate, the amount of 
the specific inheritance, the amount of the previous property of the 
heir, or the degree of kinship ? 

3. What inconveniences result from the separate administration 
of inheritance-tax laws by the several states ? 

4. Is it proper to tax an inheritance in more than one state ? Is 
the tax in practice to be paid in the state of the testator, of the bene- 
ficiary, of the location of the property, or of the trustee under the 
will? 

5. Who bears the burden of an inheritance tax? Is the burden 
according to benefit? according to abihty? 



134 OUTLINES OF ECONOMICS 

vi. Corporation and Business Taxes 

Questions 

1. Who really pays a tax levied on (a) the granting of a corpora- 
tion charter ? (b) a factory owned by a corporation ? (c) the franchise 
privileges of a public service corporation ? 

2. Is the value of a franchise an unearned increment? Should 
the total income attributable to the special privilege of the franchise 
be absorbed by taxation ? Would such taxation be confiscatory ? 

3. What is the best test of the taxable value of a business ? 

4. Is a high-hcense tax on saloons a desirable form of taxation ? 
Why ? Who bears the burden of the tax ? 

c) Tax Reform 

Questions 

1. Distinguish between direct and indirect taxes. Is the distinc- 
tion of importance in economics ? in United States constitutional law ? 

2. Of the several forms of taxation which have been discussed, 
which, in this country, are primarily employed (a) by the federal 
government ? (b) by the states ? (c) by local governments ? Why ? 

3. Of our present forms of taxation which are likely to increase 
and which are likely to decline in importance with the progress of 
scientific reforms ? 

4. Is the need of government revenues increasing? Will taxa- 
tion in the future be depended upon for larger resources than at 
present ? Would a heavier burden of taxation furnish an incentive 
to tax reform ? 

5. Try to estimate the amount of indirect tax which you pay in 
the course of a year. If people in general realized how large a pro- 
portion of their total expenditure goes for taxes would the problems 
of tax reform receive more attention ? 

6. Is the benefit theory or the ability theory of taxation the more 
acceptable at present ? Does the movement toward larger functions 
of government indicate a growing belief in one of these theories rather 
than in the other ? If so, which seems to be gaining ground ? 

7. Is a thoroughly good system of taxation attainable in this 
country without amendment oi the Constitution of the United States ? 
Do you anticipate such an amendment ? 



H. SOCIAL REFORM 

I. Criticisms of the Present Industrial Order 
II. Remedies Which Have Been Suggested 
III. Suggested Ideals of Distributive Justice 



Up to this point, the study of industrial society has been confined 
almost entirely to a study of things as they are — to an analysis of 
the actual structure wHh but little reference to proposed changes. 
The present industrial order is however neither final nor satisfactory. 
Its defects have evoked endless criticism, and many modifications of 
the existing regime have been suggested, some of which amount to 
social revolution. These criticisms and suggested remedies we may 
now consider and test with the aid of the principles established in 
our study of the economic situation as it exists. 

The outline of social reform which follows is on an extremely 
limited scale. Only so much is attempted as shall indicate some of 
the directions in which a more thorough inquiry might proceed. 
Questions are introduced, as elsewhere throughout the book, to 
develop important problems for investigation ; but on many points the 
analysis hardly goes beyond a mere schematic statement of the case. 

I. Criticisms of the Present Industrial Order 

1. Economic Defects 

a) Defects of the Productive Process 

i. Wastefulness and Duplication of Effort 

ii. Artificial Stimulation of Wants 
iii. Production for Sale Rather Than for Service 
iv. Carelessness in Conserving Human Energy 

b) Defects of the Distributive Process 

i. Great Inequalities in Possessions and Incomes 
ii. The Unfortunate Situation of the So-called Lower 

Classes 
iii. The Consequences — unbalanced social development, and 
probable impairment of the efl&ciency of production 

2. Resulting Social and Political Defects 

a) Corruption, Favoritism, and IneflSciency in Government 

b) Militarism 

c) Vice and Crime 

3. Difficulty (impossibility?) of Remedying These Evils under the 
Present System 

^35 



136 OUTLINES OF ECONOMICS 

Questions 

1. Mention two instances which illustrate each of the above- 
mentioned defects of the productive process. 

2. Is non-competitive enterprise free from waste and duplication 
of effort ? 

3. Is wastefulness an advantage in competitive industry ? Could 
it be maintained that the stimulus of competition prevents waste 
more than it causes waste ? 

4. Which is the greater danger: that competitive industry will 
stimulate excessive and artificial wants, or that non-competitive 
conditions will result in neglect to provide for wants already felt ? 

5. Would adulterated goods be offered for sale except under an 
individualistic and competitive economic regime ? 

6. How do you distinguish between adulterated or spurious goods 
and cheap substitutes? Are cheap substitutes desirable? Does 
competition favor the invention and production of such goods ? 

7. The investigators of the Pittsburgh Survey found that industries 
in the Pittsburgh district had resulted in 526 deaths from accidents 
in one year. Is this due to defects of the present industrial system ? 

8. Cite cases where fraud has been one of the forces in the present 
distributive process. 

9. How can it be argued that defects in distribution harm pro- 
duction and social development ? 

10. Are the rich growing Icher and the poor growing poorer ? 

11. Is the control of wealth ever confused with the ownership of 
wealth in discussing the great fortunes of today ? 

12. When we speak of the economic inequalities of today do we 
mean inequalities of property or of income ? 

13. Does the inducement to political corruption for individual 
advantage exist only where industrial conditions are professedly 
individualistic ? 

14. With what justice can the prevalent social and political defects 
be charged to the industrial situation ? Does the mere fact that 
defects exist condemn a system? Is any system likely to be free 
from defects ? 

15. "There can be no real political democracy without industrial 
democracy." What does this mean ? 

16. Can you give instances of wars or menace of war due to (a) 
national need for economic expansion, by enlargement of territory 
or increase of foreign trade ? (b) commercial aggression of individuals 
in foreign countries ? (c) agitation by persons who would be pecuni- 
arily gainers if war should occur ? Which of these cases are charge- 
able to the present economic system ? 



SOCIAL REFORM 137 

17. Make a list of forms of vice and crime which are fostered by 
the present industrial system, and show their relation to such causes 
as exhausting conditions of work, unemployment and want, chronic 
poverty, tenement and lodging-house conditions, etc. 

18. Judging from what you know of the way in which development 
of any kind takes place, does it seem to you likely that one could 
reason out a system which would prove more efficient in production 
than one which has actually developed through decades? Do you 
think it reasonable to expect any sudden change in the characteristics 
of the factors of production ? 

19. Does the present system seem to you to be mainly good with 
some defects, or mainly bad with some good points ? 

20. Make out a Ust of the good points of the present system. 



II. Remedies Which Have Been Suggested 

1 . Individual Reform — the Development of Different Ideals 

2. Social Reform 



I. Individual Reform — the Development of Different Ideals 

a) The Significance of Individual Reform 

b) The Agencies of Individual Reform 

Questions 

1. If all men were actuated by high ideals would it make much 
difference what the industrial system was? Should we do better 
to bring our attempts at reform to bear upon the individual, or upon 
the system ? 

2. Mention professions whose representatives are engaged pri- 
marily in reforming individuals. Mention other professions whose 
representatives are engaged primarily in reforming the social system. 

3. Do you think that individual reform would react upon social 
reform? Do you think that social reform would react upon indi- 
vidual reform ? 

4. Should you expect right-minded and law-abiding men and 
women to grow up in the streets of city slums ? 

5. Which is the more pertinent statement: (a) that men and 
women are inefficient and vicious and criminal because they have 
been born and have grown up in wretched surroundings, or (b) that 
the cause of their having been born and reared under such conditions 
is to be sought in the fact that their parents and predecessors in 
general were ineflScient, vicious, and criminal? 



138 OUTLINES OF ECONOMICS 

6. How can a person with ideals of social service make up his 
mind whether he should engage primarily in movements making for 
individual reform or in movements making directly for social reform ? 

2. Social Reform 

a) Reforms Involving No Vital Change in the Present Order 

b) Reforms Practically Amounting to Revolution 



a) Reforms Involving No Vital Change in the Present Order 

i. Reforms of the Immediate Conditions of Industry 
(i) On the Initiative of the Persons to Be Benefited 
(a) The Trade Union Movement 
{b) Co-operative Enterprises 

(2) On the Initiative of Other Persons 
(a) Profit-sharing 

(3) On the Initiative of the State 

(a) Regulation of the Conditions of Work 
{b) Workingmen's Insurance and Pensions 

ii. General Economic and Social Reforms 
(i) On the Initiative of Private Persons 

(a) Philanthropic and Charitable Enterprises 
(2) On the Initiative of the State 

{a) Direct Aid to the Needy — Poor-Relief 
{b) Tax Reforms — including the readjustment of the 
burden of government expenditures and also the less 
radical of the tax reforms designed to prevent excessive 
concentration of wealth, such as progressive income 
and inheritance taxes 
(c) Enlarged Educational Facilities 

{d) Provisions for the Public Health — hospitals, medical 
aid, facilities for recreation, housing regulations 

Questions 

1. What functions, apart from those of regulating the relations 
between workmen and employees, do trade unions commonly 
perform ? 

2. Which is likely to have greater success, producers' co-operation 
or consumers' co-operation (so-called) ? Why ? 

3. Cost of living is high. Would it be wise for a certain class of 



SOCIAL REFORM 139 

people (say college teachers) to form co-operative societies to secure 
their household provisions? What factors would make for success 
in such a venture ? What factors would make for failure ? Would 
the enterprise be apt to succeed better if membership were confined 
to one class of society ? 

4. Is there any element of co-operation in the present order? 
If so, of what kind ? 

5. Describe several forms of profit-sharing, and explain their 
respective advantages and defects. 

6. Do you think that labor unions are likely to look with favor 
upon profit-sharing ? Why ? 

7. Do you expect that either profit-sharing or co-operation will 
become general in the United States ? 

8. Is there more cause for inspection, regulation, etc., in industry 
than there was 150 years ago? Exactly why? Does the fact of 
more regulation prove that we are drifting into socialism? 

9. What are the grounds for labor legislation protecting women 
and children ? Do these reasons hold equally well for such legisla- 
tion for the protection of men ? 

10. Why is it more difiicult to get suitable factory legislation in 
the United States than in England ? 

11. What is the "sweating" system? What are its chief evils? 

12. In what industries is the sweating system most prevalent? 
How can its evils be eliminated ? 

13. Name five trades or occupations that are especially dangerous 
to workers. Should the state pass special legislation to protect 
the workers in such occupations? 

14. What is meant by "employers' Hability" ? 

15. Should the burden of workingmen's insurance be carried by 
the employer or by the state ? Why ? 

16. Which man renders the greater service, the soldier in the army 
or the worker in industry? Which more deserves a pension? Do 
you think that the United States should have a system of working- 
men's insurance against sickness, accident, old age, and death ? 

17. Suppose that sick benefits, old-age pensions, etc. (if provided 
for) raise the prices of goods to the consumer. Do you think this 
is fair to the consumer who does not receive such a benefit or pension ? 

18. Should the efforts of philanthropy and charity be directed 
more toward alleviation or toward prevention of misery ? 

19. Is the right of inheritance a natural, inherent right ? Is 
primogeniture ? Give arguments for and against the right of inherit- 
ance. Give arguments for and against the right of bequest. 



I40 OUTLINES OF ECONOMICS 

b) Reforms Practically Amounting to Revolution 

i. Land Nationalization (dealt with under "Rent") 
ii. Anarchism 
iii. Communism 
iv. Socialism 

(i) The Socialist Philosophy as Exemplified in 
{a) Utopian Socialism 
{b) Christian Socialism 
(c) State SociaHsm 
{d) Marxian Socialism 

(i) The Materialistic Conception of History 
(ii) The Marxian Theory of Exploitation 
(iii) The Doctrine of Capitalistic Contradictions — 
commercial crises, concentration of capital and 
industry, progressive misery, development of the 
proletariat 
(iv) The Class Struggle and the Social Revolution 
(v) The Co-operative Commonwealth 
(2) The SociaHst Movement 
(a) The Socialist Program 

{b) The Organization and Extent of the Movement 
(c) The Aids and Hindrances to the Movement 

Questions 

1. Carefully distinguish between anarchism, communism, and 
socialism, as social ideals, 

2. Does the philosophical anarchist seek primarily an economic 
reform ? Does the communist ? the socialist ? 

3. Can you cite cases where economic conditions appear to have 
determined men's views on morals, politics, philosophy, religion, etc. ? 

4. In reality do you think that economic conditions determine 
men's views or that men's views determine their economic conditions ? 

5. To what extent is the course of history explained by economic 
causes ? Consider, e.g., the discovery and settlement of America, and 
the various wars in the history of the United States. 

6. Do political parties represent the economic interests of con- 
tending groups of people ? 

7. Suppose it is established that labor is exploited by the employ- 
ing class. Does that prove the right of the laborer to the total prod- 
uct of industry, or establish the correctness of Marx's analysis of 
wages ? Might there be any possible remedy other than socialism ? 

8. Is there a class struggle in the United States today ? 

g. Is there a growing concentration of wealth in the hands of the 



SOCIAL REFORM 141 

few ? If so, why is this unfortunate ? Is the concentration move- 
ment inevitable in all industries ? If it is, is socialism the only remedy ? 

10. Is socialism to be judged by its ideal or by its probable work- 
ings ? Do you think one should commit himself to socialism because 
its ideals are high ? Are the ideals of the competitive system lower ? 

11. Draw up a list of difficulties which you think the co-operative 
commonwealth would experience. 

12. Do you think that all the evils of today are due to any one 
cause ? Do you think there is any one cure ? 

13. Does the present system stand committed to the continuance 
of present evils ? 

14. Do you think anyone is sufficiently wise to predict the course 
of human development for the next hundred years ? Should you take 
the stand that any set program for the future is unwise ? 

15. Do you think it possible for a government representing the 
workers to take over one great industry after another and to operate 
these great industries for the common welfare rather than for profits ? 

16. Suppose socialism were realized. What would be the effect 
upon rent? interest? profits? wages? Would there be anything 
corresponding to these shares ? Would the underlying facts of pro- 
duction be altered ? 

17. Would the necessity of taking industrial risks disappear under 
socialism? If not, who would be the risk-taker? Would risks be 
taken more wisely than under the present system ? 

18. Would the necessity of saving disappear under socialism? If 
not, who would do the saving and how? Would it be done more 
wisely than under the present system ? 

19. In a collectivist state would the worker have any more free- 
dom than he has today? 

20. It has been said that progress implies the elimination of the 
"mere muscle man." Do you agree? Is his case becoming steadily 
worse under the present system ? If so, would socialism continue 
that tendency ? 

21. Does the socialist urge equal distribution of wealth ? 

22. The socialists deny they would have a "dead level" society. 
They would permit inequalities of incomes and of possessions. Why 
should they ? When they say this do they concede the usefulness of 
many of the motive forces of the present order ? Do they retain 
many of the temptations of the present system ? 

23. If socialism were given a practical trial, do you suppose the 
result would be found free from the evidences of greed, unscrupulous 
personal ambition, fraud, and indolence which have always revealed 
themselves in other forms of economic society? 

24. Would such defects of human character be as detrimental to 



142 OUTLINES OF ECONOMICS 

the public welfare in a socialistic system as they arc when associated 
with excessive individual wealth ? 

25. The plea for socialism, it is said, has a fallacious persuasive- 
ness in consequence of the human tendency to magnify the evils of 
the existing situation, and to assume that any change will be an 
improvement. The prejudice against socialism, on the other hand, 
is aggravated by the mental inertia which resists all change. Which 
of these biases is the stronger ? Which is the more unreasonable ? 

26. When a man contemptuously dismisses a proposal for reform 
as "sociaHstic" what does he ordinarily mean? 

27. Is the capitalist in a position to form an unprejudiced opinion 
on socialism ? Is the laborer ? 

28. Are the men who vote the socialist ticket in this country com- 
mitted to any definite system of social reorganization, or are they 
opportunists, taking advantage of every available way toward reform ? 

29. What are the main planks of the platform of the socialist 
party in the United States today ? Is everyone who approves of any 
or even most of these planks a socialist ? 

30. Draw up a statement of the forces at present making for 
sociaUsm in the United States. Draw up a statement of the forces 
militating against socialism. 

31. Do you think the agitation for socialism, by counteracting 
the extreme tendencies of our present system, will lead to a compro- 
mise which will be better than either ? 

32. In what ways do you think a socialist state would be superior 
to the present competitive regime ? 

III. Suggested Ideals of Distributive Justice 

1. The Aristocratic Ideal: Special privileges for persons of special 
ability, attainment, or position. 

2. The Communistic Ideal: Equal division of all goods, or division 
according to the maxim: "From everyone according to his 
ability: to everyone according to his needs." 

3. The Socialistic Ideal: To everyone according to his labor- 
service to society. 

4. The Competitive Ideal: To everyone according to the value of 
his services. 

The above brief statement of the several ideals of distributive 
justice is designed to suggest the difference of viewpoints rather than 
to afford an adequate description of each. Communism and social- 
ism really differ not so much in ideals as in the social mechanisms by 
which they hope to reach the ideal result. The stated ideals of the 



SOCIAL REFORM 143 

socialistic and competitive systems are obviously similar, but are 
to be distinguished in that (a) sociaUsm requires some governmental 
appraisal of labor-service, while competition furnishes at least a 
tangible criterion of service in terms of exchange-value; (b) essentially 
different economic programs are advocated as the means of attain- 
ing them. 

Questions 

1. Should an unjust system of distribution endure? Is it likely 
to do so ? What do you mean by unjust ? 

2. Do any of the following illustrate the aristocratic theory; 
primogeniture, right of inheritance, the closed shop, slavery ? 

3. What advantages might be claimed for an aristocratic economic 
system in the earlier stages of civiUzation ? 

4. Does the principle of the survival of the fittest give support to 
the aristocratic theory of economic society ? Assuming that human 
ability is largely hereditary, is it not best that the descendants of the 
wealthy and successful should be given superior opportunities ? 

5. Are all men equal? If so, why do some secure exceptional 
advantages? If not, why attempt a social system which assumes 
equality ? 

6. Is it possible to reward every man according to his needs? 
How can the needs of two persons be compared? Are "needs" 
urgent necessities of bare existence, or economic wants in general, 
or aspirations ? 

7. Does the dictum "From each according to his ability" express 
a right of the incompetent to receive aid from the more capable, or 
an ideal of altruistic conduct for those in a position to be of service ? 

8. If the weaklings are given the most aid, and the burden of aid- 
ing falls most heavily on the able, will the race degenerate through a 
reversal of natural selection ? 

9. Suppose one were to accept the ideal "to each according to his 
labor." Does this mean physical labor, sacrifice, labor-time, or 
results accomplished ? 

10. Does not the present system reward according to the signifi- 
cance a service possesses for particular individuals and small classes ? 
May this not put a premium upon trivial or even immoral things? 
Would it be better to let a government bureau adjudge the worth of 
the service ? How is this bureau to arrive at its standards ? How is 
it to apply them ? 

11. "In order that the motive of self-interest may be made to 
serve the interests of society, all harmful or socially unprofitable 
ways of pursuing self-interest should be closed. The advantage 
of individuals will then depend upon the measure of their contribution 



144 OUTLINES OF ECONOMICS 

to the well-being of others." Is this true? Give examples of the 
way in which law and public opinion have directed competition into 
beneficial channels. 

12. Advocates of the competitive system have more or less ex- 
pressly assumed (a) that every individual of mature age and sound 
mind knows his own interest better than a body of officials can, and 
(b) that each individual, if left to himself, will pursue his own interest. 
Criticize these assumptions. To what extent are they true ? 

13. Does the competitive ideal seem to you harder to attain than 
the others? Is it made more easily attainable by the fact that it 
utilizes both selfishness and unselfishness ? 

14. Do you see any difference between saying that things ought 
to be thus and so and saying that the state should at once proceed 
to make things thus and so ? 

15. Which is more important: approximate equality of possessions 
or approximate equality of opportunity? Do we have to destroy 
the present order to secure the latter ? 

16. With a more general diffusion of knowledge, culture, publicity, 
etc., is political democracy in more or less danger? Is equality of 
opportunity more or less likely to ensue ? 

17. Do you think that the indictments of the present order by men 
who are the results of this order indicate anything as to the possibility 
of improvement under the present system ? 

18. What real difference is there between the professed ideal of 
socialism and the professed ideal of the competitive system ? 



OCT 16 1912 



LIBRARY OF CONGRESS 



008 941 693 



